CRE Loan Distress Levels Escalating Rapidly

Volume of Delinquent/Defaulted CMBS Loans Could Triple in 2009

The distressed loan situation in commercial real estate is taking a striking turn for the worse, according to a CoStar Group analysis of December loan information on more than 83,000 loans in commercial mortgage backed securities.

The level of distressed loans in the CMBS universe was at historically low, and unsustainable levels, in 2008 - less than 1% of outstanding loans. That compares favorably to the level of commercial real estate distress in bank and thrifts where distressed properties made up about 2.32% of their nonresidential portfolios as of Sept. 30.

However, that level of safety in the CMBS universe looks like it could be eroding rapidly.

The amount of loans placed in special servicing - generally an indication of a delinquency or failure to pay off a mature loan - rose dramatically in the fourth quarter - from about $400 million per month in September to more than $1.6 billion in November.

And that trend is likely to continue in the near term as the number of loans identified by CMBS servicers as having potential credit issues more than doubled from about $3.5 billion per month to about $7.5 billion in November.

In preparation for its first market outlook presented last week, CoStar also undertook its first-ever analysis of delinquent and distressed properties in the CMBS market, examining loans with a total value of more than $700 billion.

Read the article with graphs here. Special thanks to CoStar Group, Mark Heschmeyer & Steve Olson.