Air rushing out of California commercial real estate

SACRAMENTO — From an unfinished shopping mall in Elk Grove, Calif., to the ghostly quiet office parks of South Placer, the slump that has overtaken commercial real estate could rival the meltdown in the housing market.

Across the Sacramento region, vacancy rates have soared while rents and property values have plummeted, leaving many landlords struggling to pay their mortgages. A few are in bankruptcy protection.

Sacramento's troubles are worse than most, according to national analysts, but the threat looms across the entire country. With the national economy seemingly poised for a recovery, some experts fear the recession could be prolonged if commercial loans go bust like residential mortgages.

"It's very analogous to what happened with the residential market," said Mark Friedman, a prominent Sacramento commercial developer. "Money was cheap, growth was rapid, and we built a lot more product than we needed."

Others, though, say the problems in commercial don't run as deep. Most developers didn't borrow as recklessly as homeowners and are able to cushion themselves against falling revenue streams.

"People were so highly leveraged in their homes – they were borrowing against them to buy their big-screen TVs or whatever," said Mitch Derenzo, chief financial officer at American River Bank of Sacramento. "It doesn't appear that the commercial side is so highly leveraged."

But no one doubts that the problems in commercial real estate are serious. American River just reported a second-quarter loss of $704,000, its first loss in 25 years. Derenzo said the main culprit was a big leap in nonperforming commercial real estate loans – that is, mortgages that have been delinquent for at least 90 days.

So far, defaults and foreclosures on commercial loans have lagged behind the pace in the residential sector. But the most severe problems in commercial real estate lie ahead.

Read the full story at