Recent reports from a couple of research firms confirm that defaults on US commercial property loans are surging, standing at the worst level in 16 years. The reports also confirm it is going to get much worse going forward into 2010 and 2011, also as expected.
A report from Real Estate Econometrics states that the percentage of commercial real estate loans in default across the nation have risen to 3.4 percent in the third quarter, rising over half a percentage point from the second quarter.
Real Estate Econometrics measured commercial real estate data based on mortgages held by retail, industrial, hotel and office properties. The 3.4 percent default rate is already the highest since 1993, where it stood at a 4.1 percent default rate.
On multifamily mortgages, the default rate has exploded, now more than double what it was in 2008. Apartment buildings also continue to increase at a strong default rate, as just from the second quarter they’ve risen from 3.14 percent to 3.58 percent.
Lead economist for Real Estate Econometrics, Sam Chandan, said the idea that all of this is a regional bank problem is a myth, as each bank and how it handled generating the loans in the first place will determine the impact on their bottom line. “The conditions of each bank need to be evaluated on their own merit, said Chandan”
In other words, those who managed their risk throughout the loan process and operated from a conservative viewpoint will hold up much stronger than banks that pretty much threw caution out the window on many of their commercial loans.
As far as the financial numbers go, commercial mortgages held by banks past due by 90 days and up, increased to $4.4 billion, a strong increase over the $3.5 billion in the second quarter. For financial institutions holding deposits, commercial real estate mortgage defaults are expected to rise to 4.0 percent by the end of 2009, increase to 5.2 percent in 2010, and probably peak at 5.3 percent in 2011.
As far as commercial mortgage-backed securities in default, there was an increase of 2.6 percent to $32.55 billion from October to September, according to Realpoint. That’s an extraordinary 504 percent increase over 2008, and is 14 times higher than the $2.21 billion registered in March 2007, the time the U.S. commercial real estate boom had reached its highest point.
Realpoint states in their report that before the second quarter of 2010, commercial mortgage-backed securities balances will reach somewhere between $40 billion to $50 billion. Eventually the percentage of delinquencies could grow as high as 8 percent in 2010.
