by Calculated Risk on 12/18/2008 12:10:00 PM

Excerpts from S&P Press release (no link):

It's become clear during the past few months--and especially in the past few weeks--that the problems facing the global financial markets and the U.S. economy have left the commercial mortgage-backed securities (CMBS) sector in a fundamentally weaker credit position. As a result, Standard & Poor's Ratings Services is expecting an increase in the number and severity of CMBS downgrades in 2009 ...

"Now that the U.S. is officially in a recession, and since commercial real estate performance typically tends to lag U.S. economic developments, we're expecting property values to continue to drop and loans with marginal cash flow to default with increasing frequency," said credit analyst James Manzi. "We believe that borrowers with negative equity have little incentive to come 'out of pocket' to bring their payments current," he said.

Evidence of this malaise appears to be mounting: The delinquency rate has been increasing significantly, and Standard & Poor's internal reporting measures show an acceleration in the volume of troubled loans, especially large loans. "Any current change in property prices is hard to measure accurately because of the marked reduction in transaction volume during 2008, but estimates we've seen indicate a decline of roughly 10%-15% from the peaks of early 2007. And the gap between offered prices and asking prices, in our view, signals that valuations must decline further to restart any meaningful trading activity," said credit analyst Barbara Duka.
emphasis added

Unlike with residential real estate, commercial owners are much more willing to "walk away" from their properties. As we've discussed before, many commercial properties were purchased with interest reserves - and those reserves are currently covering the negative cash flow. When the interest reserves run out, the owners will probably default.