Commerical Mortgage market will slump less deeply as Residentail Market

J.P. Morgan Securities, which says the economy has entered a recession, projected last week that commercial-property losses over the next five to eight years will be about $120 billion, or roughly 4% of the sector's $3.2 trillion in debt outstanding. But that's far short of the $200 billion in losses that J.P. Morgan is projecting from the subprime debacle, a 15% loss rate. William Tanona, a Goldman Sachs Group analyst, expects Bear Stearns Cos., Citigroup Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley to take combined commercial-property-related write-downs of $7.2 billion in the first quarter, following $1.8 billion of them in the fourth quarter. Policy makers have become increasingly concerned about the stresses commercial property are putting on small and midsize banks. But many of their problem commercial-real-estate loans are actually housing-related: The banks typically classify construction loans made to condominium and single-family home builders as "commercial." In the fourth quarter of 2007, 7.5% of the loans from federally insured banks and thrifts to builders of single-family homes were 30 days or more past due, up from 2.1% a year earlier, according to Foresight Analytics, a research company in Oakland, Calif. For banks lending to condo developers, the pain was even worse. Delinquencies for condo-construction loans rose to 10.1% in the fourth quarter, up from 2.6% a year earlier. By comparison, delinquencies on nonresidential commercial mortgages, secured by properties like office buildings and shopping malls, were 1.6% in the same quarter, up slightly from 1.1% according to Foresight Analytics. The delinquency rate on the $840 billion of U.S. commercial mortgage-backed securities outstanding is less than 0.5%, near its historic low, according to Trepp LLC, which tracks the market. While the rate is rising, Moody's doesn't expect it to exceed its average of closer to 2% over the next 12 months. Compare that with the roughly 20% of commercial loans made by life-insurance companies in 1986 that defaulted in the subsequent 10 years. Why is the current bad-loan rate so low? For most of this decade, developers have been showing unusual discipline in delivering new product, with the exception primarily of hotels. Office-property developers in the top 50 markets this year are expected to complete 53.9 million square feet of office space, according to Reis Inc., a real-estate data company. While that's close to double the 2004 pace, it is less than 40% of the average 144 million square feet that was delivered annually in the five years leading up to the collapse of commercial real-estate prices in the early 1990s. Sam Chandan, Reis's chief economist, says that commercial developers haven't overbuilt due to high construction costs and because the commercial real-estate market didn't start recovering from the last recession until 2004. Usually it takes a few years after a recovery before developers start building speculative projects that have little or no pre-leasing. "We weren't far along enough in the cycle for the market to start chugging," he says. "And then demand began softening because of [the] residential" market.