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Commercial real estate outlook turns grim

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Just as the commercial real estate sector showed signs of recovery, analysts now forecast a renewed struggle as the economy slumps. Financial advisory firm Deloitte said in a report Thursday modest GDP growth, still high unemployment and weakened housing demand delayed a full-fledged commercial real estate recovery. Nearly $1.7 trillion in CRE loans will come due between 2011 and 2015. According to Deloitte, 60% of these loans are underwater, making it difficult for tenants to refinance and extend their terms. This strategy of "extend and pretend" may be waning as workouts faded in the first quarter of 2011 and new commercial REO showed an uptick (see chart below).

The National Association of Realtors projects vacancy rates to drop across all commercial real estate types over the next year, but the weakened economy will take its toll. "Disappointing economic growth in recent months means a slower recovery for most of the commercial real estate sectors, although multifamily housing continues to benefit from pent-up demand resulting from an abnormal slowdown in household formation in recent years," NAR Chief Economist Lawrence Yun said. CRE delinquencies in the first quarter did decline to 7.5% from 8.7% one year ago, but defaults remain at historic highs, Deloitte said. New originations totaled $118.8 billion in 2010, increasing 44% from the year before, and Deloitte analysts believe should continue trending up. New CMBS issuance should triple to $47 billion in 2011 and investor interest is improving. But Deloitte said new originations are only of the highest quality and smaller regional banks still hold a lot of exposure to the CRE loans set to mature by 2015, increasing refinancing risk. "Prospects for a broad CRE market recovery likely will be enhanced when lenders resume loan originations for 'nontrophy' assets and refinancing options increase to stabilize debt maturities," Deloitte said. Write to Jon Prior. Follow him on Twitter @JonAPrior.

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