Commercial Real Estate is quickly deteriorating in the US. In early January, Stuyvesant Town defaulted. Stuy Town will likely serve as the poster child for the CRE bust, as it was the largest deal during the boom and will probably result in a roughly 50% loss when all is said and done. January saw the default rate for Commercial Mortgage Backed Securities rise to 5%, with an average loss severity of 52.7%.

February isn’t looking better. Fitch reports that CMBS defaults have jumped to 6% (registration required). Retail, industrial, and office space are pulling down the average (all are still worse than a month prior), while hotels and apartment buildings are defaulting at alarming rates.

In the race to the next catastrophe, it looks like CRE was not the next shoe to drop. The foreign debt markets can deteriorate much faster than CRE. Europe’s PIIGS appears to be taking the lead for that team. State budgets could conceivably make a sprint for the finish line, and I favor California over Illinois. Option ARM recasts appear to be out of the running, and may have another full year before they start to hurt. Construction and Development loans, many (if not most) of which escaped securitization, will only take down regional banks. Contagion will be slow there.