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Forget U.S. housing, worry about commercial real estate Add to ...

Now that the residential housing market is showing a little bit of life in the United States, whispers about the impending crisis in the commercial real estate sector have grown louder.

"Risk distribution is shifting from the housing market - which has been the Achilles' heel of the U.S. economy for three years now - to commercial real estate," Scotia Capital economist Gorica Djeric wrote in a note to clients Wednesday.

The U.S. Federal Reserve's most recent Beige Book - an economic update - showed activity stabilizing in most sectors. However, commercial property sales fell by 80 per cent year over year in the first half of 2009. Prices are down 31 per cent in the same time.

"The Moody's/REAL commercial property index has retrenched back to late-2003 levels. As a result, vacancy and default rates are on the rise, lease terms are shorter and rental rates are being driven lower."

The Canadian market has been showing tentative signs of recovery ahead of its U.S. counterpart, with the Toronto market posting positive growth in the third quarter for the first time in 18 months. In the U.S., however, analysts don't expect to see stabilization until at least mid-2010 as tight lending also keeps a lid on recovery.

"Although a considerable workout period lies ahead for CRE, a number of factors should help support the adjustment process," she said. "While the recovery might not be as vigorous as in the previous cycles, the U.S. economy is slowly regaining momentum. A prolonged period of low interest rates should lend an hand, too, as will the unprecedented amount of fiscal stimulus efforts, of which only about a third is to be spent this year."

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