Industry Wonders How War Might Affect Real Estate.

Commercial mortgage delinquencies have held up very well in the current economic downturn, but everyone is now watching on the outcome of a war with Iraq to see what might happen in the future. The possibility of war now appears more likely, and a long drawn-out war is likely to have a negative impact on commercial mortgage delinquencies going forward.

Stuart Gabriel, director of the Lusk Center for Real Estate at the University of Southern California, believes that if a U.S.-led invasion of Iraq turns into a protracted conflict, consumer confidence could plunge and stock prices could fall, which could cause the U.S. economy to go back into recession and send commercial property markets into a deeper slump.

Mr. Gabriel notes, "History could repeat itself. Further weakening in economic activity would exacerbate the slump in the nation's commercial property markets." At the start of the Gulf War in the early '90s, he recalls, consumer confidence plunged, sending the economy into a prolonged recession.

In the worst-case scenario of a long drawn-out war, demand for office space - which has already been weakened by the loss of 2.4 million jobs nationally over the last two years, according to Mr. Gabriel - would fall further, causing rents to soften further.

In this scenario, consumer confidence and spending would also fall, causing retail sales to slow and reducing demand for retail space. Businesses would spend less on plant and equipment, resulting in a decreased demand for industrial space. And the hotel market, which is finally beginning to recover from the 9/11 slump, according to Mr. Gabriel, could fall back into a decline.

In a more optimistic scenario, "The cloud of uncertainty over the U.S. economy could be removed if the U.S avoids war or carries out a quick invasion with minimal loss of life and minimal damage to Iraq's oil fields," Mr. Gabriel believes. In this case, ...