Commercial Defaults Hit Record for Both Investors and Banks

Thu, Jun 3, 2010


By: Carrie Bay

Pressures continue to drive up commercial mortgage defaults. The economic downturn has choked off demand for retail and office space, with vacancy rates rising and prospects of new occupants limited by the duress of today’s
job market. At the same time, commercial real estate (CRE) values have dropped more than 40 percent in some markets, pushing a growing number of property owners severely underwater.

Plagued with the same trip wires that have set off a barrage of residential mortgage delinquencies – unemployment and negative equity – the CRE market, too, is dealing with a monstrous volume of loan defaults. Two separate studies by CRE analysts show that defaults on commercial mortgages, both held by banks and those owned by securities investors, have reached new record highs.

According to new data from Real Capital Analytics, the default rate for commercial real estate loans owned by the nation’s FDIC-insured banks increased from 3.83 percent in the fourth quarter of 2009 to 4.17 percent in the first quarter of 2010.

Real Capital says this is the highest default rate reported since 1992, the first year for which data is available, when it was 4.55 percent. Year-over-year, the default rate

is up by 192 basis points. By contrast, at its cyclical low in the first half of 2006, the commercial mortgage default rate was 0.58 percent.

As of the first quarter of this year, $45.5 billion of bank-held commercial mortgages were in default, according to Real Capital’s tally.

The research firm segregates multifamily apartment loans from the broader category of commercial mortgages, which includes hotel, office, retail, and industrial. In the first quarter of this year, the default rate on multifamily mortgages held by banks hit 4.62 percent, up from 4.41 percent the previous quarter, and the highest level on record going back to 1992. In total, $9.9 billion of bank-held multifamily mortgages were in default last quarter.

A separate study released this week by Trepp LLC shows that the share of past due loans held by investors in commercial mortgage-backed securities (CMBS), including those already in foreclosure and REO, jumped 40 basis points in May to 8.42 percent – the highest in the history of the CMBS industry.

For seven of the last eight months, the rate of increase in CMBS delinquencies has been between 37 and 49 basis points in Trepp’s study. The only exception was February of this year when the delinquency rate nudged up only 22 basis points.

To put the delinquent CMBS universe into perspective, Trepp says that just six months ago, the delinquency rate was 5.65 percent. One year ago, it was 2.77 percent.

The risk assessment and analytics firm notes that results were mixed across the varying property types. In May, the industrial sector was the only one to post a decline in CMBS delinquencies, dropping from 3.44 percent in April to 3.34 percent. Hotel delinquencies claimed the biggest jump, up 129 basis points to top out above 18 percent.

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