Commercial property prices to drop 5-10 percent

NEW YORK Wed Feb 20, 2008 2:21pm EST

1 of 2. REFILE - CORRECTING NAME Mark Zandi, Chief Economist of Moody's Economy.com, answers questions during the Reuters Housing Summit in New York, February 20, 2008.

Credit: Reuters/Chip East

NEW YORK (Reuters) - Commercial property prices will likely decline between 5 percent and 10 percent as the impact of a slowing economy and aggressive underwriting take a toll, Mark Zandi, chief economist of Moody's Economy.com, said on Wednesday.

Defaults on office building, retail stores and hotel loans will fall short of the crisis in residential mortgages, but will still exceed their historical average, Zandi told the Reuters Housing Summit. Retail properties will see the most significant problems as the U.S. economy flirts with recession, he said.

"Prices in the commercial market were overvalued," he said. Price drops will be "not 20 percent (as in U.S. house prices), but I'd say 5 percent to 10 percent."

While commercial real estate weakness will fall short of that in residential properties, credit problems will worsen since underwriters loosened standards in 2006 and 2007, he said. Fundamentals in commercial real estate, such as vacancy rates, are still relatively strong and may not show significant weakness until 2009, he said.

A Moody's Investors Service index of commercial property prices fell 1.5 percent in December from November, led by weakness in apartments, the rating company said on Tuesday. The Moody's index showed prices rose 8.3 percent over the same period a year earlier, but reflected some declines in three of the last four months of 2007.

Regional banks that provided commercial real estate loans have especially large risks, Zandi told Reuters.

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Al Yoon; editing by Jeffrey Benkoe)