The fortunes of the US residential real estate market are not necessarily an indication of things to come in the commercial sector, argues Bob White

Foreclosures and declining prices dominate news reports on the US real estate markets. Commercial real estate insiders have dubbed it "headline risk" referring to the propensity of news to be negative, creating a largely false perception of the commercial property markets, especially among foreign investors.
Even though most articles pertain only to residential real estate, many assume the commercial markets are in the same dire straits and the high-profile problems at Centro and Macklowe further contributed to this misconception. In truth, foreclosures of office buildings and shopping centres are still a rare occurrence and prices have held up relatively well so far. There is no doubt the commercial markets are suffering - property sales are off 75% from a year ago - but the commercial markets are not facing the meltdown occurring throughout the housing sector. Three important distinctions between the two markets should keep commercial property prices from cratering as home prices have:

Commercial property prices did not rise as far nor have they fallen as quickly as house prices. In fact, commercial prices are only off 2.6% since their peak, while housing prices are off 15.8% nationally. Commercial sellers have yet to discount their prices and are simply opting to hold. There are no banks flooding the commercial market with foreclosed properties nor are there many highly motivated sellers whose finances have been turned upside down. To the contrary, commercial rent and occupancy declines have been limited so far, and the fundamentals are sound. The commercial markets did not get overbuilt like the housing markets. Between 2000 and 2005, residential construction doubled while commercial development stalled. Entire neighbourhoods were vacant as the housing markets became grossly oversupplied. Meanwhile, occupancy rates for office, industrial, retail and hotel properties are just slightly lower and still healthy. Commercial mortgage delinquencies are just a fraction of those experienced for residential mortgages. Mortgage delinquencies, a fairly current gauge of distress among real estate owners, are up only 20 bps in the past year for commercial mortgages compared with 150 bps for residential mortgages. Commercial delinquencies among banks are higher than for CMBS since they have more construction loans whereas properties in CMBS pools are generally all income-producing. To the extent there is distress in the commercial market, it is currently limited to land and development deals, the non-income producing properties.

Believe it or not, homebuilders are coming up with some creative ways to offer their products, including a southwestern US homebuilder that is offering a two-for-one deal on houses.
Meanwhile, some lenders fighting to keep down their growing stock of foreclosed homes have been taking prospective buyers on bus tours, allowing them to show many properties to multiple prospects all at once.

Bob White is president of Real Capital Analytics