The crumbling real estate market has spread from the residential housing sector and right on over to the commercial market, hitting some exchange traded funds (ETFs) where it hurts.

New York City commercial real estate transactions have fallen 61% in 2008, hurt by a severe lending slowdown and stoppage. David M. Levitt for Bloomberg explains that about $17 billion of transactions have closed so far and the market is headed for its worst year since 2004.

About 85% of domestic banks tightened lending standards on commercial and industrial loans to large- and mid-size firms in the last three months. The office market is said to be likely to get worse in 2009, and might not see improvements for another year.

Vornado Realty Trust (VNO), however, managed to beat analysts’ earnings projections on gains from the sale of real estate. This is the third-largest U.S. real estate investment trust (REIT), owning about 34 million square feet of office space primarily in New York and Washington. Revenue rose 6.3% in the third quarter, good news amid the gloom for the New York-based firm, Levitt reports.

Vornado benefits from having lower exposure to financial services tenants than other property owners in New York. However, that’s not to say that other tenants are immune from a downturn.

• SPDR Dow Jones Wilshire REIT (RWR): down 29.9% year-to-date; VNO is 5.7%

• iShares Cohen & Steers Realty Majors (ICF): down 31.5% year-to-date; VNO 6.9%

Tags: ICF, Real Estate, REITs, RWR, Sector ETFs