Commercial Real Estate Direct Staff Report
The default rate for commercial real estate loans held by banks and thrifts is projected to jump to 3.9 percent at the end of the year, from 1.36 percent at the end of last September, according to Real Estate Economics Inc.
The economic and risk-advisory company was recently launched by Sam Chandan, the former chief economist at Reis Inc. It relied on data from FDIC's quarterly banking profile to make its projections.
Chandan is projecting that the default rate would continue climbing in the coming three years, hitting 4.7 percent in 2010 and 4.8 percent in 2011. It would then start retreating, hitting 4.2 percent in 2012.
The projections for a spike of bank-held commercial mortgage defaults this year mirrors those for the CMBS market. Realpoint, for instance, has projected that delinquencies would climb to $15 billion in the coming months from $8.7 billion at the end of December.
Chandan said his models assumed that the $1 trillion of non-farm, non-residential loans would remain relatively unchanged throughout the year. Roughly $873 billion of those loans could be classified as income-producing commercial property loans, with the remainder construction and development loans. Those loans had a 1.36 percent default rate at the end of the third quarter, slightly lower than the 1.39 percent for all commercial loans.
Lenders have been originating fresh mortgages, but "they're not making them as fast as the (universe of mortgages) is shrinking" through pay-offs and other means.
As a result, Chandan's projection of a 3.9 percent default rate would mean roughly $40.7 billion of bank-held commercial mortgages would be in default by the end of the year. He projects that 2008 ended with a default rate of 1.8 percent, or $14.2 billion of loans.
Chandan said the growing default rate could be impacting banks' lending habits. "Because defaults grow, you become hesitant to make new loans."
The FDIC counts as defaulted those loans that are at least 90-days late or that have been classified as being non-accrual, meaning the lender doesn't expect to recover the loan's full interest and principal obligation.
Chandan attributed the higher default rates and volumes to borrowers' inability to extend maturing loans, tighter credit standards by lenders, declining property values - which incidentally are driven by the relative lack of available financing - and the deterioration in property fundamentals.
Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.
