Commercial real estate market in distress in California

Distress in the commercial real estate market is reaching crisis proportions just as the residential market starts to right itself.

Bankers and market trackers say more owners of office buildings, shopping centers, apartments, hotels and industrial space are struggling to make their mortgage payments, and increasingly defaulting. Analysts call it a replay — although on a smaller scale — of the housing crisis that damaged the region's economy.

"It's going to get ugly, and we're not seeing the worst of it yet," said Garrick Brown, Sacramento-based vice president for research at commercial broker Colliers International. "Anybody who bought from 2005 to 2008 and financed more than 50 percent might be on a tightrope."

Property owners who financed small strip shopping centers at the height of the boom are especially vulnerable — reeling under debts incurred before unemployment jumped to 13 percent and consumers curtailed spending. Their properties line the intersections in the new suburban neighborhoods hit hardest by foreclosures.

"I empathize with people who are learning the lessons that some of us learned in the early 1980s and again in 1990," said Paul Petrovich of Sacramento, one of the region's largest commercial property developers. "There were many ill-conceived projects built for the sake that financing could be secured and not based on good, sound fundamentals."

Commercial rents in some overbuilt areas have dropped 20 to 40 percent, by some estimates. More than 16 percent of area office space and 13 percent of retail space sits empty, reports Colliers.

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