Commercial Sector Remains Strong Despite Housing Woes.

Midway through 2007, commercial real estate markets are going strong, aided by an economy that has weathered the housing slowdown well so far and generated a fair amount of job creation. And in spite of reduced levels of home equity to draw on, consumer spending is still going strong.

On the housing slowdown front, a large part of the impact has been absorbed, in the form of buyback calls from Wall Street players that caused a number of subprime originators to go out of business, and in the tightening of underwriting standards by lenders. However, it remains to be seen what happens when adjustable-rate mortgages already in the system start resetting to higher rates. These ARMs don't form the major part of the mortgage loans made in the last few years though, and not all of them are going to default when payments start resetting upward, and it doesn't seem likely that their resetting will have a major systemic impact.

On the topic of defaults, Moody's Investors Service reports that defaults on lease payments by the largest tenants was the most common cause for putting commercial mortgages into special servicing in 2006, accounting for 37% of such loans. This is based on a universe of Moody's-rated securitized commercial mortgage loans, not including multifamily properties and manufactured home communities. Buildings in larger metropolitan areas are less likely to be impacted by tenant defaults while buildings in smaller markets with economies that are not well diversified can be impacted more by tenant defaults, the report says. According to Moody's, loans on buildings outside the larger metropolitan areas that enter special servicing are represented "at approximately twice the frequency that their total share of CMBS collateral would suggest."

And the latest commercial real estate market report from Moody's says that the limited-service hotel sector saw the greatest performance improvement of seven commercial property sectors in the first quarter. The credit rating agency reports in its second-quarter market update, based on data from the first quarter, ...