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Is There Another Shoe to Drop in 2010?

Over the next few weeks, we will be talking much more about what’s to come in 2010 and the potential impact on investors.

Commercial Real Estate
Photo by: Nathan Guy
Commercial Real Estate

A lot of investment pros and business leaders are concerned that the next big problem for the economy and the stock market could be a crisis in commercial real estate.

But, they’ve said, that probably wouldn’t happen until 2010.

Well, here we are.

So, is commercial real estate the next shoe to drop?

And if so, how bad will it be?

Here’s what I’m hearing: While most people expect upset in that sector, they believe it will be more orderly and less stomach-churning than the run of home mortgage foreclosures and the financial crisis that devastated the economy.

During a speech I attended at the New York Economic Club in November, Fed Chairman Ben Bernanke mentioned commercial real estate as one of the risks to the economy, saying the fallout for banks could hinder recovery.

A high unemployment rate of 10% means businesses require less office space, leaving more vacancies and driving rental rates down. A still-cautious consumer is tough for retail shops, a sizable number of which are going out of business. And loans are difficult to come by in this tight credit market, making it hard to refinance debt. Add to that what may have been too much building in the boom times, and it’s likely to add up to continued problems for commercial real estate.

Most analysts expect to see loan defaults in 2010 and possibly into 2011. A recent report from Real Estate Econometrics stated that the default rate on commercial real estate loans reached 3.4% in the third quarter, its highest level in 16 years. That same firm projected that default rates would hit 5.2% by the end of next year before topping out at 5.3% in 2011.

I don’t think many people are expecting a crisis in commercial real estate to match the magnitude of the financial crisis in 2008. Nonetheless, you can be sure investors everywhere will be following the situation closely, and we will do the same at Investor Brief. It will likely be one of the most significant influences on both the economy and the stock market in the coming year.

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