Its Only Just Begun

NEW YORK (Reuters) - The default rate of U.S. commercial real estate bank loans reached its highest level in 15 years and is not expected to peak until 2011, according to a report by Real Estate Econometrics.

During the first quarter 2009, the national default rate for commercial real estate mortgages held by regulated depository institutions rose to 2.25 percent from 1.62 in the fourth quarter of 2008, according to the real estate research firm's report released on Tuesday. The 0.63 percentage-point jump is the largest quarterly increase since at least 1992, and pushed the default rate to its highest level since 1994, the New York-based firm said. The default rate does not include loans on apartments, which increased by 0.68 percentage points between the fourth quarter and first quarter 2009 to 2.45 percent. The analysis of the data from the Federal Deposit Insurance Corporation (FDIC) includes non-farm, non-residential property where the primary source of repayment during the term of the mortgage is derived from the property's rental income. The multifamily results include buildings with five or more units.

Depository institutions hold about half the $3.2 trillion in debt on U.S. commercial property, with the commercial mortgage-backed securities market accounting for about 25 percent of that. Insurance companies and government-sponsored entities such as Fannie Mae account for the remainder.

Real Estate Econometrics attributed the default surge to rising vacancy rates, falling rents and increasing operating expenses all of which made it more difficult for borrowers to meet principal and interest obligations. Additionally, those borrowers who had been current were not able to refinance or sell their properties in order to meet balloon payments required by maturing mortgages because of the tight lending markets. Mortgages originated in 2006 and 2007 experienced the most significant cash shortfalls because of the large number of mortgages that were based on overly aggressive rent and occupancy projections.

"Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate, while others are lending only with existing relationships," the report said. Real Estate Econometrics also revised its default projections higher. It sees the default rate rising to 4.1 percent by the end of the year, up from its prior forecast of 3.9 percent. By the end of 2010, the default rate is expected to rise to 5.2 percent, up from the prior outlook of 4.7 percent.


It expects the default rate for U.S. commercial loans held by banks to peak at 5.3 percent in 2011, up from its forecast of 4.8 percent. The more sour forecast was due chiefly to a more pessimistic outlook for the overall economy, a projected rise in long-term interest rates and a slower-than-expected policy response to commercial real estate credit constraints. It sees the national default rate for multifamily mortgages is projected to rise to 4.5 percent in the fourth quarter of 2009 and peak at 5.5 percent next year. ~ Reporting by Ilaina Jonas, editing by Matthew Lewis (Reuters)


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Lately, there has been a wealth of information concerning the health and state of the Commercial Real Estate industry and the article posted today is no different, but at SpacePlace.net, we feel it is vitally important that our members are kept up to date with the most current information available. We promise not every post will be about the impending doom of CRE, but enlight of all the new information, we feel it is critical to our members to share what others around the country are saying. Check out the latest article below!

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Even if rents and vacancies don't totally collapse, the commercial real estate market may be in for violent upheaval, if only because there isn't enough available credit to deal with all the re-financings. The New York Post runs down some of the grim numbers: At the center of the worries is some $3.5 trillion in debt backed by everything from strip malls to offices and apartments across the nation -- the lion's share of which is badly underwater because this recession followed a five-year commercial property boom fueled by easy money and loose underwriting standards.

Now the owners of the less-than-full malls, apartment complexes and office buildings are succumbing to the worst economic collapse since the Great Depression -- because they can't refinance the debt. The commercial debt securitization market is dead. "Because there is no securitization the system cannot process the wave of maturities coming due," said Scott Latham, commercial property broker at Cushman & Wakefield.

"This is arguably the most important fact we're going to be dealing with. If there's no mortgage market that can feed the machine you're just not going to have deals," he said. "It's going to be years before we recover and even when that happens we're going to discover that we're in a new paradigm," Latham added.

About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone. From what we've heard, it's impossible to overstate how stingy commercial real estate lenders have become. Even projects with very solid tenants and no indication of a drop-off are having a hard time rolling over their debt. Still, there's a difference between a homeowner going into foreclosure and a commercial real estate owner that still has paying tenants. Whoever receives the property will still be seeing cash flow, and there's a good chance it will have some value, rather than some house in the middle of nowhere, with no prospects of being sold, whose only realistic fate is a bulldozer. ~ By Joe Weisenthal of Clusterstock.


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