Although the housing market has started to show signs of recovery, the future of commercial real estate is looking increasingly grim. And this could be a sign of trouble for the fragile U.S. banking sector.

The economic recession and the rising unemployment rate has forced businesses to cut back on rental space, which has resulted in decline in revenue for many landlords. Moreover, it has become increasingly harder to refinance due to tighter underwriting standards and falling real estate values.

The rate of property owners who are defaulting on loans is also rising at an alarming rate. there are many banks that are stuck with shopping malls, hotels and offices buildings which they have repossessed but are unable sell. Such loans have caused many banks to close such as Horizon Bank in Pine City, Minn., and Omni National in Atlanta.

Experts say that this may be the worse situation since the 90’s and the worse may be yet to come.

According to a senior economist at the University of California, Los Angeles, we haven’t seen the end of these delinquencies and defaults. About $3.5 trillion of commercial real estate loans are held by banks, and are tied up in commercial mortgage-backed securities or held by other institutions.

By 2013, more than $2 trillion in commercial mortgages are expected. But many property owners will face an uphill battle to qualify for refinancing due to tightened underwriting standards and falling real estate values.

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