Growth In Commerical Real Estate Defaults Appears To Be Slowing

While the default rate for commercial real estate mortgages continued to increase during the second quarter of 2010, the overall trendline appears to be slowing down. Even as …

While the default rate for commercial real estate mortgages continued to increase during the second quarter of 2010, the overall trendline appears to be slowing down. Even as the overall US commercial real estate mortgage default rate continues to incrementally inch up, apartment and multifamily mortgage sectors appear to be entering into recovery as default rates in these areas decline. See the following article from National Real Estate Investor for more on this. 

By now, most commercial real estate pros are thinking the same thing – whatever happened to that 100-foot high wall of water (aka tsunami) that was to wash through the industry and cleanse the bad properties from the system? For pennies on the dollar?

Now “keep on waiting/lurking” seems to be the prevailing view. According to New York-based researcher Real Capital Analytics, the default rate for commercial real estate mortgages held by the nation’s FDIC-insured depository institutions did increase by 9 basis points to 4.28% in the second quarter, up from 4.19% in the first quarter.

For those of you keeping score on a historical scorecard, at its cyclical low in the first half of 2006, the commercial mortgage default rate was 0.58%. A mere pittance.

Year-over-year, the tale is more striking, with the commercial default rate up by 139 basis points.

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However, rather than gaining speed, the negative trendline appears to be slowing. Year-over-year increases had been accelerating for thirteen consecutive quarters through the end of 2009, but have moderated more recently.

Consistent with the slower increase in the default rate, the dollar volume of commercial mortgages in default measured its smallest increase since the second quarter of 2007, three years ago. Now some $46.2 billion of bank-held commercial mortgages are in default, up by just $547 million from the first quarter of 2010.

Apartments March Ahead

The nation’s apartment sector appears to be recovering faster than other segments, in a sort of “first in, first out” play on the recession.

In the second quarter, the multifamily mortgage default rate declined by 47 basis points, from 4.63% to 4.16%, falling below the commercial default rate for the first time in two years.

The default rate for multifamily mortgages surpassed the rate on commercial mortgages in the second quarter of 2008, and remained marginally higher during the following nine quarters.

“The second quarter drop was the first meaningful decline in the multifamily default rate this cycle,” notes the RCA analysis. The volume of multifamily mortgages in default fell by $1.0 billion from the first quarter, to $8.9 billion.

Reflecting differences in loan quality across lender groups, the default rate for bank-held multifamily mortgages is still significantly higher than for multifamily mortgages at Fannie Mae and Freddie Mac. In spite of the challenges in their single-family lending portfolios, the GSEs’ multifamily portfolios continue to perform. The serious delinquency rate for Fannie Mae’s multifamily loans is 0.8% as of June 30, up from 0.5% one year earlier, but much lower than for the market as a whole.

Banking on Defaults

The largest class of banks – those with $10 billion or more in assets – accounted for 48.6% of all bank-held commercial mortgages and had the highest default rate, at 4.98%, according to RCA’s analysis. But the combined multifamily and commercial real estate concentration at these institutions (CRE loans as a percent of all loans) was the lowest of all the bank peer groups, at 12.1%.

This article has been republished from National Real Estate Investor. You can also view this article at
National Real Estate Investor, a site covering commercial real estate news, trends, and research.


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