In the U.S. market, commercial real estate is being hit hard. According to the Mortgage Bankers Association, there is approximately $3.1 trillion in commercial debt outstanding and delinquency rates among these properties are escalating at alarming rates. The securitized market represents about $724 billion and there is concern that the increasing unemployment rate will hurt more property owners and thus cause more defaulting mortgages. Delinquent loans, considered 60 or more days in arrears, have substantially increased in two years. The delinquency rate now stands at 2.67% for the entire commercial sector. A year ago the rate stood at .46%, a startling 480% increase in one year. According to Moody's, in July 2007 the delinquency rate was a mere .22%.
As a comparison the housing market's mortgage delinquency rate stood at 7.8% at the end of the 4th quarter of 2008. One might conclude that the commercial market is healthy, but what is concerning is the rate of increases quarter by quarter in delinquencies. Many experts are predicting the delinquency rate to make a steep climb to 5-7% by year end. Couple these steep increases with $814 billion in mounting debt maturing over the next 3 years and U.S. commercial real estate is bound for some trouble. It's estimated that $250 billion is expected to mature this year. But, the pivotal year is 2011, with $296 billion originated by banks, CMBS lenders, and life insurance companies expected to come due.
Moody's says the hotel sector had the highest increase this past month of all the sectors, which now stands at 3.26%. The industrial sector stands at 1.96%, retail at 2.92% and multi-family at 4.58%. Some are calling for a 10% delinquency rate over the next few years. If this occurs, watch out for many more failing banks and REO's to come to market.
If delinquencies continue we are expecting to find opportunities in apartment investing and retail investments. We are monitoring pockets of opportunity where real estate will be bought at discounted pricing over the next year or two.
Written by Michael Duhs, a real estate broker in southern California, specializing in apartments, senior housing, and triple net real estate investments in the counties of San Diego, Orange County, Los Angeles, Riverside, and San Bernardino. http://www.EastWestCommercial.com/
East West Commercial Real Estate