The often predicted tsunami of commercial real estate failures has yet to materialize and an article in the WSJ today indicates that, at least in the office sector, things may be stabilizing.

Commercial real estate, an enormous sector with some $1.4 trillion of debt coming due by the end of 2014, has been closely watched by regulators and financial companies because it could act as an anchor on the economy as it struggles to recover. For months the news has been bad, with declining rents and rising vacancies pushing more properties into default, foreclosure and bankruptcy. Thousands of landlords are struggling with properties valued at less than their mortgages, like millions of “underwater” homeowners.

The pressure on rents now seems to be easing. Average effective rents—taking into account concessions such as a few months of free rent—for some 4 billion square feet of office space tracked by research firm Reis Inc. fell by just a penny in the last three months, the smallest quarterly decline since 2008. At $22.05 per square foot per year, effective rents are 12% below the 2008 high of $25.07.

In another sign that the bottom is near, the increase in the national vacancy rate in each of the past two quarters was smaller than quarterly changes throughout 2009. Reis economists said the vacancy rate is now unlikely to reach the 1992 high of 18.7%. At the time, the commercial-real-estate industry was reeling from massive oversupply. “If we’re not at the stabilization point, we’re getting close,” Reis economist Ryan Severino said.

A couple of thoughts.

Some analysts have noted that the office sector was not overbuilt as it was in the S&L bust. I guess the point being that once we hit a point of stabilization then it’s potentially a fairly quick recovery. Maybe and maybe not.

It’s probably true that in both Phoenix or Las Vegas that the office sector wasn’t overbuilt for the level of economic activity going into the recession. You might make that same statement about New York or Boston. Today one could probably make a credible case for those two Western cities having been overbuilt for a normal economy. It’s still a somewhat open question as to whether or not that would apply to New York and Boston.

Just a reminder that all real estate is local and that the optimal level of available office space is still very much a guess.

While there may or may not have been over building in certain areas, there is little doubt that there was over buying. By that I mean that the office sector traded at unsupportable cap rates. Even if vacancy rates and rents do a marked turnaround the reality is that there are a lot of properties that still won’t be near economic viability.

The game is still extend and pretend. The banks, particularly the small and mid-sized institutions are still badly exposed to losses in this sector. Stabilization, if it’s for real, is to be welcomed. Just don’t assume that there isn’t a lot of pain still to be absorbed.