The Next Shoe to Drop: Commercial Real Estate

Long the saving grace in the real-estate market, plummeting commercial construction may finally break the economy's back.

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I try to stay ahead of the curve.

Which is why, nearly two years ago, I wrote a piece on the impacts of the housing bust on the job market.

In short, I noted that all those millions of people who chased the real-estate boom—the newly minted real-estate agents, the mortgage brokers, the developers, and the construction workers—had added more jobs to the economy than had any other industry, at its height accounting for about 1 in every 10 jobs: a record, according to Moody's Economy.com. (In California alone, the number of real-estate brokers rose to more than half a million workers—more than the total number of homes sold in the state last year.)

"We're more dependent on housing than at any time in the last 30 years," Moody's chief economist Mark Zandi told me, "which could be a problem if the downturn becomes more pronounced."

Yet until just recently, it wasn't. While the folks I wrote about were forced to give up selling mortgages and houses, their lost jobs were offset by a continuing boom in commercial real-estate development. In San Diego, for example, while condo construction all but dried up, a dozen or more fancy new hotels and office buildings were rising into the skyline, offering jobs aplenty to many of those thrown out of work in residential construction.

Yet as several economists noted at the time, the commercial building cycle is far slower than the cycle for residential housing. Big buildings take years to get approval and years more to construct. "There's somewhat of a time lag here," Jay Butler, director of the Arizona Real Estate Center, said. "But everyone's eventually going to feel it."

Nearly two years later, we're doing exactly that as whatever backlog there was back then has been all but erased. And with demand for commercial space falling and credit as tight as it has been in more than a decade, new construction is slowing— with construction in January down by 1.7 percent, the largest decline in 14 years—as the massive commercial real-estate market slowly grinds to a halt.

The result isn't just more job losses in the real-estate sector—it's more write-downs for the banks that have financed the huge commercial projects. Indeed, today's Wall Street Journal suggests that the result will be yet another ugly round of write-downs for the banking industry as commercial property values decline by as much as 26 percent over the next two years.

All this isn't just to say I told you so (although I pretty much did, didn't I?).