by Calculated Risk on 1/16/2008 11:16:00 PM

From the WSJ: Las Vegas Default Highlights Commercial-Property Crunch

The credit crunch ... is starting to bite commercial projects, too.

Yesterday ... the developer of a twin-tower casino resort in the heart of Las Vegas, defaulted on a $760 million loan from Deutsche Bank AG ... Moody's Investors Service warned last week that the corporate default rate for the construction and building industry could reach 12% this year and predicted a 6% default rate in the hotel, gaming and leisure industries.
...
Around April of last year, commercial lenders started to get nervous about the lax underwriting standards that developed during the property boom. Bankers began to raise interest rates and required borrowers to put in more of their own money into deals.

At this point in the investment cycle, a CRE slump would be expected. For more see Investment Patterns. The final graph in the referenced post shows the typical relationship between Residential and non-residential investment:

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. The normal pattern would be for investment in non-residential structures to have turned negative now.

The strong investment in non-residential structures has been one of the keys to avoiding recession through Q3 2007. Now that commercial real estate appears to be slumping, it looks like non-residential investment will slump too - putting the economy into recession.