Well, not quite.  It's more like pre-mending, as the rate of growth in delinquencies slows down:


The easiest way to determine if things are getting better would be to look at delinquencies. Here are some measures:

cre delin 2010-q3.png

Let's look at each of these lines. First, the green one shows commercial mortgage-backed securities (CMBS) portfolios and includes the earliest-term delinquencies. Although they continue to rise, they're doing so consistently more slowly, as the distances between each point have been decreasing for about a year. The red line is the most severe delinquencies, as 90 days or more delinquent means that the properties are essentially defaulted. Its story is similar, as delinquencies have continued to grow, but not as quickly as they had in prior quarters. Finally, delinquencies on 60 or more day multi-family portfolios owned by Fannie Mae actually declined during the quarter.

This data hardly indicates that all problems are behind the commercial mortgage market, but it does suggest that a recovery probably isn't far off. 


I wrote about the problems in the commercial real estate market at the beginning of 2010; they arrived right on schedule.  It would be nice to think that they will start to recede as this year dawns.

As I learned then, however, there are two indicators that need to lead a recovery in CMBS: retail sales, and employment.  The major components of commercial space are offices, hotels, and retail, but hotels are slightly special; because (unlike the other two) they do not work on long term leases, they're the first thing that tanks when recession hits, and recovery is idiosyncratic.  As for the other two, the connection is obvious: you don't open up new stores when retail sales are bad, and you don't lease new office space unless you've got more butts to put in the extra seats.  So while commercial real estate delinquencies may eventually flatten out as the owners of the worst of the overleveraged properties get washed out of the market, the commercial real estate market won't really recover until retail sales are up, and companies start hiring again.

On that, we've got two happy indicators:  Christmas sales are strong, and ADP issued a great jobs report this morning, with employment growth coming in way over expectations.  Let's hope that trend continues--and not just because it's good for commercial real estate.

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