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Tickers in this Article: PRU, MET, FITB, GNW, MCO
As the world's economies slowly rise out of the worst recession in our lifetime, the 800-pound gorilla of commercial real estate lurks in the background, threatening to put a damper on any recovery. The latest reports from ratings agencies have only stoked the fire. (Learn more about commercial real estate in Find Fortune In Commercial Real Estate). Moody's (NYSE: MCO) reports that the value of commercial real estate has fallen to levels not seen since 2002, as the Moody's/REAL Commercial Property Price Index hit 109.61 last September. This was 43% below the peak recorded in October 2007.

Banks And Insurers At Risk
Banks and insurers are obviously at risk due to loans outstanding in this sector and billions in bonds and direct real estate investments.

Fitch Ratings also recently reported that life insurers would endure an estimated $18.5 billion to $22.6 billion in losses from commercial real estate through 2011, as vacancies soar and rents fall throughout the U.S. and other areas.

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Q3 Commentary Confirms General Market Worries
General market worries about commercial real estate have been confirmed by investor and company commentary during third-quarter earnings season.

During its conference call, Prudential Financial (NYSE: PRU) said that it expected the commercial real estate market to be down 45% peak to trough, but that "2010 should be a better year in terms of the marketplace in general than 2009," according to Bernard B. Winograd, executive vice president at Prudential.

Losses In Commercial Real Estate Won't Be Shared Equally
MetLife (NYSE: MET) reported minimal losses and delinquencies on its portfolio of commercial real estate mortgages in the Q3 and a 67% loan-to-value ratio.

Genworth Financial (NYSE: GNW) had a $3.9 billion commercial mortgage-backed security portfolio at the end of Q3 2009. Eighty-five percent of the portfolio is still rated AA or better despite the turmoil in the markets. The company also has direct loans out on real estate but has only 10% of those loans maturing in the next two years.

Fifth Third Bancorp (Nasdaq: FITB) said it plainly for its shareholders during its conference call. The bank has a total commercial real estate loan portfolio of $16 billion, which is 20% of the entire loan portfolio.

"The main challenge currently is commercial construction and real estate. This is not a new development. I think we are just in the heart of that part of the cycle," said Kevin Kabat, CEO of Fifth Third Bancorp. The bank lost 20 cents per share in the Q3 due to write-offs of commercial real estate and other loans.

Management members added that they "don't believe real estate losses will trend much higher going forward than the current level." They attributed this to the high level of income-producing properties in the porfolio.

Bottom Line
Every time optimism in the markets starts to spring forward, it is brought down to earth by a cautionary warning about the coming plague of bad commercial real estate loans. The veracity of these warnings will help determine investment returns in 2010 and beyond.

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