Commercial real estate owners are walking away from properties that have become untenable as investments, just as homeowners have walked away from houses they can no longer afford to pay off or sell.

The latest commercial property owner to do this is Vornado Realty Trust (VNO), the $13 billion real estate investment trust, which warned last week that it would walk away from two loans totaling $235 million.

The trend is likely to escalate in coming months as more loans mature and refinancing remains difficult and costly. As with residential properties, there is less incentive for owners to hold on to properties when the buildings are worth less than what is owed on their mortgages.

"Frankly, I am surprised that we have not seen a lot more," said Rob Little, chief investment officer of Cornerstone Real Estate Advisers LLC, with $32 billion under his management.

Commercial mortgages are in the throes of a painful correction. Delinquency rates are up, property values are nearly 40% off from their peak valuations, occupancy rates and rents are down. Further, as loans mature, many find it difficult to obtain fresh capital, and so they seek extensions on current loans.

However, of late, some commercial property owners find that it makes more economic sense for them to stop making payments and servicing the debt, and walk away from a property. Since most of these commercial loans are non-recourse, there is no direct obligation or claim on the owners' assets.

In the residential market, the phenomenon is referred to as "jingle mail," a reference to homeowners who surrender their property by mailing the keys to the lender rather than go through a formal foreclosure process.

An added factor is that in this recent credit cycle the stigma attached to commercial real estate developers who walk away--which previously meant investors would boycott the companies--has faded. Investors have little recourse but to wait to see if protections built into the bond offer a cushion from losses.

Little said that owners of properties that are well underwater have been able to keep them afloat by taking advantage of low interest rates engineered by the Federal Reserve to try to revive the economy. But when it comes time to refinance, the numbers often don't work anymore.

"Current valuation (on property) lurks out there when loans mature," Little said.

Vornado, for instance, said a subsidiary would not make up any shortfalls in the debt service on loans secured by properties in High Point, N.C. At the end of 2009, the net book value of the properties was about $148 million; the debt secured by these properties is $218 million.

Other well-known and well-funded operations have opted to do this as well, said Aaron Bryson, analyst with Barclays Capital.

BlackRock Inc. (BLK) and Tishman Speyer Properties gave control of Stuyvesant Town/Peter Cooper Village housing complex in Manhattan to creditors. They bought the property for $5.4 billion, and its current value stands at less than $2 billion.

This trend, analysts say, came to the fore last fall when Maguire Properties Inc. (MPG), a large office building owner in Southern California, handed over the keys to seven towers to creditors.

"These sponsors have the ability to support the debt, but choose not to," Bryson said. "It comes down to pure economics."

Most property owners will first try to modify or workout a loan to keep alive the possibility of gains when the market recovers, Bryson said.

"But if a property is deeply underwater, and the cost of modification is too high," he added, "then it can make sense to walk away."

If these loans have been bundled into commercial mortgage-backed securities, as most are, then investors in the bonds--especially those who own parts backed by subordinate debt--are likely to be most affected quickly.

"If you are a triple-A holder, you are counting on protection and support that is built in," Little said. "If you are a subordinate bond holder, you are deeply concerned about it."

However, there's little else these investors can do.

"You can complain all you want, but you are not going to get anything," Bryson said. "Most CMBS loans are non-recourse, so an investor has no claims on other sponsor assets."

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com
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