by Calculated Risk on 8/12/2007 10:52:00 PM

Here are some excerpts from a couple of articles today on commercial real estate (CRE). First, as a reminder, in a typical cycle investment in non-residential structures follows investment in residential structures with a lag of about 5 quarters.

Click on graph for larger image.

This graph shows the YoY change in Residential Investment (shifted 5 quarters into the future) and investment in Non-residential Structures. In a typical cycle, non-residential investment follows residential investment, with a lag of about 5 quarters. Residential investment has fallen significantly for five straight quarters. So, if this cycle follows the typical pattern, non-residential investment will start declining later this year.

Right now it appears the lag between RI and non-RI will be longer than 5 quarters in this cycle. Although the typical lag is about 5 quarters, the lag can range from 3 to about 8 quarters.

From the WSJ: Commercial Building Bolsters Cities

Even though home sales in Phoenix dropped nearly 30% last year, an estimated $2.3 billion in commercial projects are planned for downtown Phoenix alone, an unprecedented amount.

Phoenix isn't alone. Commercial-construction activity has "been very strong for most of this year in most regions of the country," said Ken Simonson, chief economist at the Associated General Contractors of America.

... it isn't clear that commercial construction will continue to expand at the current pace given the increasing skittishness of banks and other lenders to extend loans to anything related to real estate. Even though most of the problems in the credit markets are related to rising defaults and foreclosures on residential mortgages, some bankers are pulling back on all types of loans, a trend that could threaten the national economy.

If the pullback in credit spreads to commercial real estate in a significant way, the economy in Phoenix and other places could lose one of its last major growth supports. Of course, with so many projects under way and years away from completion, the commercial market can't change direction as quickly as residential construction did. But the credit pullback is a threat if banks stop funding construction.

From Reuters: Lending woes hit commercial real estate market

The havoc in the credit markets could reduce prices that office, industrial, apartment and shopping-center properties have commanded over the past few years.
...
Because of the turmoil in credit markets that started in the residential mortgage sector, commercial mortgage lenders are charging higher interest rates and lending lower portions of the purchase price -- despite lower vacancy rates and higher rental rates.
...
About 40 percent of those mortgages were from the start headed for the commercial mortgage-backed securities market ... because of the volatile credit markets, issuers have had a difficult time selling the bonds at the prices they had baked in when they bought the loans.
...
It's difficult to price the deal," said Wachovia senior analyst Brian Lancaster. "Nobody wants to make a loan that they're going to lose money on. Better not to make any loan. You're not sure you can sell it."

Lancaster estimated that new loans in the CMBS pools have raised some borrowing costs 80 basis points to 180 basis points -- or as much as nearly 2 percentage points.