Nov. 5 (Bloomberg) -- U.S. mortgage lending for commercial property fell 54 percent in the third quarter from a year earlier, led by a decline in loans for malls and shopping centers, the Mortgage Bankers Association said.

The dollar value of loans dropped 56 percent for office properties and 40 percent for apartment buildings, the Washington-based Mortgage Bankers said in a statement today. Loans for malls and shopping centers fell 62 percent and hotel loans declined 46 percent.

The credit crisis has driven $138 billion worth of U.S. commercial properties into default, foreclosure or debt restructuring, according to New York-based Real Capital Analytics Inc. Lenders are reluctant to extend credit as property values fall and unemployment rises. Commercial real estate prices have plunged almost 41 percent since October 2007, the Moody’s/REAL Commercial Property Price Indices show.

“Credit conditions are constrained,” said Sam Chandan, president and chief economist of Real Estate Econometrics, a property research firm in New York. “The market’s need for credit to support pending refinancings is very large.”

The volume of sour loans means commercial property lending will undergo a “dramatic change with better underwriting,” George Marcus, chairman of Essex Property Trust Inc., a Palo Alto, California-based apartment owner, said today at the Urban Land Institute’s annual conference in San Francisco.

CMBS Defaults

The rate of defaults and late payments on property loans sold as commercial mortgage-backed securities jumped more than fivefold in the third quarter, to 4.52 percent from 0.8 percent a year earlier, according to Reis Inc., a New York-based real estate research firm. About $26.6 billion of CMBS loans were 60 days or more past due.

About $550 billion in outstanding commercial loans are “going badly at a rapid rate” and will lead to the closure of an additional 200 small banks across the U.S., Kenneth Rosen, who heads the University of California’s Fisher Center for Real Estate and Urban Economics in Berkeley, said at the ULI conference.

The Labor Department will report tomorrow that the unemployment rate rose to 9.9 percent in October from 9.8 percent the previous month, as companies cut 175,000 more jobs, according to the median projections from Bloomberg News surveys of economists.

“Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Federal Open Market Committee said in a statement yesterday. The panel restated its plan to keep interest rates “exceptionally low” for “an extended period.”

Apartment Vacancies

Job cuts lower demand for office space as employers house fewer workers, and rising unemployment has helped drive the nation’s apartment vacancy rate to a 23-year high. Both make it harder for landlords to pay their bills.

The Fed kept its benchmark overnight lending rate at between zero and 0.25 percent, where it has been since December.

“Household spending appears to be expanding, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit,” the FOMC said after meeting in Washington.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.

Last Updated: November 5, 2009 15:14 EST