Capital returns on US commercial real estate fell to a record low in 2009, according to the Investment Property Databank (IPD) US Quarterly Property Indicator. The report monitors the trends in underlying market value and returns of $76.5bn of assets held by real estate funder managers in the US. Capital returns fell 23.9% in 2009 for a total decline of 33.4% from the peak of real estate values in December 2007. Capitalization rates – or the ratio between the net income from the asset and its original price – sunk another 140 bps over 2009 to 7.1%, the highest level in six years. Delinquencies on commercial mortgage-backed securities (CMBS) loans reached 5.42% in February, according to Moody’s Investors Service. The pace of market value decline eased over Q409, but continued capitalization rate pressure and “weakening” rental fundamentals continues to curb the optimism toward 2010 as the year of recovery. “2010 in many ways is a crunch year for US commercial real estate,” said Simon Fairchild, managing director for North America at IPD. “The ‘extend and pretend’ policies banks adopted last year to stave off loan-to-value covenant breaches may have curbed the tide of rising loan delinquencies in the short-term, but lenders and investors need to always retain a vigilant eye on the health of real estate fundamentals. One focus this year will be to track signs of stress in occupier markets; particularly in cities with rising vacancy rates.” IPD studied five commercial real estate markets in the US: New York, Washington D.C., Chicago, Los Angeles and San Francisco. Analysts found a divide between the two coasts. New York, Chicago and Washington had smaller market value write-downs than the US market average, but Los Angeles and San Francisco markets fell below that average. The chart shows annual capital returns from the peak to the trough. San Francisco values declined 4.1% in Q409 and 27.5% over the year, the most of the five cities. Values dropped 39.4% from the peak to the trough. On the other end of the spectrum, Washington values dropped 22.1% over the year and 31.6% overall. Write to Jon Prior.