The US economy's weakness is starting to exert a toll on commercial property owners, as a rising glut of office space makes it more difficult for some owners to make mortgage payments.
Demand for commercial office space remains poor as companies cut back on costs. Rents have hit multi-year lows while office vacancies are high, nearing levels last seen in the recession of the early 1990s.
The national vacancy rate for office properties rose from 8 % in 2000 to 16 % last year. Cities that were host to many technology-related firms, such as Boston and Seattle, have even higher vacancy rates.
"For buildings with leases rolling over this year, there may be some re-leasing challenges," said Tad Philipp, managing director at Moody's Investors Service.
Large office properties are suffering the most from the economic downturn.
A property known as Market Center in San Francisco - now one of the most difficult office markets in the country with rents down 60 % over the past two years - is only 17 % occupied.
In New York, the AT&T building located in Tribeca in downtown Manhattan is 64 % occupied, but has declined in value by 30 % over the past two years.
The problems experienced by these properties in attracting new tenants has made them less valuable as collateral in financial transactions that pool mortgage loans.
Ratings agency Standard & Poor's has downgraded commercial mortgage- backed security deals that use the Market Center and AT&T building as collateral.
It has also warned that other office loan delinquencies - loan payments more than 30 days past due - will rise as revenues from office properties fall.
In addition to facing a sharp decline in tenant demand, landlords are also dealing with rising insurance and security costs, and increasing property taxes.
Other sectors of the property market under stress include the hotel and lodging sector.
Hotel and lodging properties were only just starting to recover from the decline in travel after the September 11 terrorist attacks when the war in Iraq, and now the Sars health scare, further deterred travel.
Although hotels have cut their expenses to preserve cash, credit analysts warn that many are operating "at the margin" and are vulnerable to a further loss of business.
Delinquent loan payments at deals involving the Holiday Inn and Ramada hotel chain franchises are running at particularly high levels, according to Moody's.
Financial Times
Publisher: Financial Times
Source: Financial Times
