Those who've been holding their breath for a commercial real estate meltdown may want to exhale.

Over the past two years, pundits have been predicting that commercial real estate would be the next proverbial shoe to drop, further wrecking bank balance sheets following the downturn in the residential housing market.

But by most accounts, a full-blown commercial real estate crisis has never materialized, and recent numbers suggest the forecast is improving.

"Most of the skeletons are out of the closet," says Dan Fasulo, managing director of Real Capital Analytics, a market research firm. "Everybody knows where the troubled loans reside and the tremendous recovery in values in major markets has moved many owners and lenders from a nightmare scenario to a situation where a nice majority of the debt has the ability to be restructured."

In recent quarters banks holding commercial and multifamily real estate loans have been feeling less pinched, according to a report released by the Mortgage Bankers Association earlier this month. Excluding construction loans, the share of commercial mortgages 90 days or more past due held steady at 4.18% in the first quarter after dropping from 4.41% in the third quarter of last year.

According to Fitch Ratings, about $2.5 billion of previously delinquent securitized commercial mortgages were resolved or liquidated in June, the second highest total on record. Although there were $1.8 billion in new defaults, the unusually large number of liquidations brought down the overall delinquency rate for CMBS.

None of this is to say it's all smooth sailing from now on. A huge amount of commercial real estate is still underwater. Forty-nine percent of commercial mortgages maturing this year are larger than their collateral is worth, as are 63% of the loans maturing next year, according to Trepp, a research firm in New York.

That puts pressure on property owners to find cash to refinance, and on lenders to offer more generous terms. The future health of the market is also dependent on larger economic forces.

Although it has suffered from many of the same ailments that took down the residential market, such as overleveraged borrowers, "the commercial real estate market is much more sophisticated in its ability to make the necessary adjustments," says Taylor Grant, founding principal of California Real Estate Receiverships in Newport Beach, Calif.

"So overleveraged commercial real estate property is getting repositioned — that can include restructuring notes with existing borrowers, selling the note to a new entity, appointing a receiver, and eventually selling it, or they foreclose and put it in their REO department and sell it."

Data from Trepp shows that commercial real estate values are still off by 47% from their peak in 2007. However, Grant argues that low interest rates, coupled with beefed-up commercial servicing departments, have given banks the wherewithal to weather the hard times.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.