Commercial Mortgage Defaults Hit 16-Year High

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The default rate on commercial real estate mortgages held by U.S. banks closed out 2009 more than double what it was a year earlier. Real Capital Analytics reportedTuesday that the default rate on loans made for office, retail, hotel, and industrial spaces shot up to 3.8 percent in the fourth quarter of last year, compared to 1.6 percent for the same period in 2008. It’s the highest the rate has been since 1993, when it hit 4.1 percent, explained.

Real Capital divides the commercial real estate (CRE) sector, with the property types above grouped together and multifamily apartment properties analyzed separately. Defaults on multifamily mortgages soared even higher – a staggering 250 percent – with the rate jumping from 1.8 percent to 4.4 percent, according to Real Capital’s data.

The New-York-based research company’s current market assessment shows that there are 8,942 commercial properties in the United States classified as “distressed,” representing a combined volume of $183 billion. And those figures are expected to go higher still.

Real Capital projects that default rates on office, retail, hotel, and industrial properties will rise from 2009’s 3.8 percent to 5.1 percent by the end of this year, finally peaking at 5.4 percent in the final months of 2011. The company expects multifamily defaults to peak earlier, topping out at 5.3 percent by the end of 2010.

Sam Chandan, Real Capital’s newly appointed global chief economist, told that these projections assume “limited additional policy intervention in support of bank lenders with concentrations in commercial real estate.”

According to Real Capital, U.S. banks held almost $1.1 trillion in commercial loans for office, retail, hotel, and industrial spaces and $211 billion in multifamily loans as of December 31.

The company says smaller institutions with $100 million to $10 billion in assets have CRE concentrations of approximately 33 percent, and higher delinquency rates than larger lenders. Top tier banks, although they hold 48.3 percent of outstanding CRE mortgages, have a concentration of just 12.5 percent, Real Capital said, with a smaller percentage of the loans going bad.

“With the concentration of commercial mortgages in small and community banks, there is a potential spillover that will impinge on their ability to make loans to small businesses and families,” Bloomberg News quoted Chandan as saying.

This same concern was echoed by the Congressional Oversight Panel earlier this month in its evaluation of the commercial property market. The federal watchdog group said losses from defaults on CRE loans could go as high as $300 billion over the next few years and threaten the balance sheets of nearly 3,000 community banks nationwide.

“The level of distress [in the commercial sector] continues to rise irrespective of improving economic trends,” Chandan commented to Bloomberg.

These improving trends include a record monthly gain in commercial real estate prices during the month of December. As previously reported, data from Moody’s Investors Service shows that commercial property values rose 4.1 percent in the final month of 2009 – the largest jump ever seen by the company in its 10 years of tracking the sector’s price movement. Moody’s analysts said in the report that they believe “the period of large price declines is over.”

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Paul Roesch
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Marketing Director 
Certified Distressed Property Expert, CDPE
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