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From WSJ:

Even optimistic commercial-property developers are stacking sandbags to hold back a financial deluge in the market for office towers, hotels, shopping malls and other commercial real estate.

The consolation is that it looks like commercial property in the U.S. faces a once-every-25-year flood, not the once-a-century inundation facing the nation’s housing market.

In recent weeks, sales of commercial property have nearly hit a standstill. And the market value of such properties — and the mortgages on them — have declined as the spreading fallout from the crisis in risky, or subprime, mortgages has made credit practically evaporate.

Developers are putting the brakes on new projects, cutting deals with tenants to keep space occupied and, if possible, extending the terms of their existing debt when it comes due. Some owners, like New York’s Harry Macklowe and Centro Properties of Australia, a big investor in U.S. shopping malls, are under siege by creditors, forcing them to put properties on the block.

On the bright side, however, the commercial-property downturn isn’t expected to be nearly as steep as the current slump in the housing market, where recent data showed foreclosures rising to the highest level on record in the fourth quarter of 2007.

Losses by commercial-building owners, lenders and investors are likely to be tempered by the lack of overbuilding in recent years and the ability of most office buildings and other commercial ventures to keep current on their mortgages.

That’s partly because commercial properties typically produce income. While millions of American homes are under water because their value has fallen below the amount owed on them, most commercial buildings are generating enough cash to pay off their loans.

“Fundamentally the markets are in pretty good shape,” says James Duca, managing director of Moody’s Investors Service.

So far, most of the pain from the downturn has been borne by banks and other institutions that hold debt or securities collateralized by commercial-real-estate loans. These loans have fallen in value as the market has struggled to reappraise their risks.

The outlook could worsen if the U.S. falls into a deep recession, driving rents down and vacancies up. But even without a deep dive, it isn’t going to be pretty.

J.P. Morgan Securities, which says the economy has entered a recession, projected last week that commercial-property losses over the next five to eight years will be about $120 billion, or roughly 4% of the sector’s $3.2 trillion in debt outstanding. But that’s far short of the $200 billion in losses that J.P. Morgan is projecting from the subprime debacle, a 15% loss rate.

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