The trouble in the commercial real estate markets is getting ugly, as the precarious situation of Dubai World has made all too clear.

Expect many more unpleasant situations like that one. Speculative-grade debt issuers are bracing for the default rate to hit 12% to 14% by the end of 2009, according to our projections at Bain & Co. The last time the U.S. economy experienced default rates of that magnitude was 28 years ago. The current long-term average default rate is 4.5%; as recently as 2007, it was just under 1%. These failures are not limited to small or marginal firms; they are happening at large companies with at least $100 million in assets, and have, after all, already hit legendary businesses like General Motors, Lehman Brothers and General Growth Properties.

What's significant is not just that big, high-profile companies have defaulted—by missing a payment, making a distressed exchange with lenders to buy time or filing for bankruptcy—but that virtually every sector of the U.S. economy has been touched, including automotive, home building, industrial products, entertainment, media and financial services. Now watch for commercial real estate.

In aggregate, default rates will probably peak this year, but above-average default rates will last through 2011, since defaults historically lag changes in gross domestic product by 12 to 18 months. Like depth charges, defaults will continue to explode as cash positions sink, even as the economy recovers. By the end of this year, we will have seen nearly 300 speculative-grade issuers default on their debt in 2008 and 2009; only 116 did in the four years between 2004 and 2007. Yet as many as 300 more companies are likely to default by the end of 2011, and that could increase if current GDP expectations prove too optimistic. This could hit commercial real estate particularly hard since cash flows there are tightly linked to employment growth, making prolonged high unemployment an additional challenge on top of other economic woes.

Read the full article at Forbes.com