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Despite Recovery, Dark Stores, Offices on the Horizon

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The economy may be on the road to recovery, but the worst has yet to come for the commercial real estate market.

That's the conclusion of a recent Congressional Oversight Report. It says that between this year and 2014, some $1.4 trillion in commercial real estate loans will come due and have to be renegotiated.

A slew of store and office closings could be on the horizon. Commercial property values have fallen 40 percent since 2007 with many properties being worth less than their current mortgages. As companies face new and tougher loan terms, more spaces may go vacant.

“A significant wave of commercial mortgage defaults” would have a negative effect on the “lives of nearly every American,” the congressional report says. “Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment.” Empty office complexes, hotels and retail stores “could lead directly to lost jobs,” it says.

In Richmond, the downturn “has already started,” says John B. Levy, a commercial real estate banker in Richmond. “Commercial real estate has lost 40 to 45 percent of its value. … We're seeing 20-percent vacancy rates at Innsbrook.”

Even so, Levy believes that the coming woes don't presage a return to recession. For one thing, he says, the Richmond apartment market isn't in bad shape.

Commercial real estate also is a lagging economic indicator, meaning it often shows signs of a downturn even as an economic recovery is under way. Many economists believe the recession ended in the middle of the summer. “It takes a while for the mouse to move through the snake after it's been swallowed,” Levy says.

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