Problems in the commercial real estate sector "It's just one more thing to worry about,"

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Problems in the commercial real estate sector, which have already given shares in some lenders a drubbing and pushed one real estate trust to the brink of bankruptcy, are poised to worsen as the jobless rate soars, says Moody's Investors Service.

"It's just one more thing to worry about," said John Lonski, Chief Economist at Moody's Capital Markets. "This is not good news for those that have exposure to office space, especially office space funded with large amounts of debt."

He found a strong correlation between the U.S. unemployment rate over the last several decades and the U.S. office vacancy rate. For every one percentage point rise in the unemployment rate, the vacancy rate tended to rise by 3.2 percentage points.

With economists expecting the quarterly average unemployment rate to hit 9.2% in the fourth quarter, office vacancies are poised to jump.

Lonski forecast the vacancy rate could climb to nearly 19% at the end of the year from 14.7% in the fourth quarter of last year. That higher rate would be the steepest since 1992, when the U.S. real estate market was suffering its last major collapse.

Economists polled by MarketWatch expect the Labor Department will say Friday the unemployment rate already hit 8.5% in March. Read more in Economic Preview.

They got a preview of how bad job losses in March may have been with a report Wednesday from ADP Employment Services. The payroll services provider said private-sector firms cut 742,000 jobs, the large job losses recorded by ADP in its nine-year history. See story on ADP.

Following the report, BNP Paribas economist Brian Fabbri revised the bank's forecast for March job losses to a loss of 700,000 from a forecast of 615,000.

'The next shoe'

Emptier offices push down rents, driving down cash flows from these properties. That decline makes it harder for property owners to pay on their loans, teeing up banks that made a lot of commercial mortgages for more loan write-downs. Regional banks are particularly vulnerable, analysts say.

"The next shoe has dropped," wrote Joe Morford, an analyst who covers Western banks, in a report last week.

"It now appears that the next leg of the credit cycle is upon us, with CRE-related issues surfacing at most, if not all, of our banks."

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