February 25, 2010
US commercial mortgage defaults soar
(SAN FRANCISCO) The default rate for commercial property mortgages held by US banks more than doubled in the fourth quarter and may reach a peak of 5.4 per cent at the end of next year, according to Real Capital Analytics Inc.
The default rate for loans on office, retail, hotel and industrial properties surged to 3.8 per cent from 1.6 per cent a year earlier, the New York-based real estate research firm said on Tuesday in a report. The default rate for loans on apartment buildings climbed to 4.4 per cent from 1.8 per cent.
'The level of distress continues to rise irrespective of improving economic trends,' Sam Chandan, Real Capital's global chief economist, said in an interview.
The US jobless rate declined to 9.7 per cent in January from 10 per cent in December, after hitting a 26-year high of 10.1 per cent in October.
Unemployment and tighter credit are hurting commercial property values, which fell 29 per cent in December from a year earlier and are down 41 per cent from the October 2007 peak, according to the Moody's/REAL Commercial Property Price Index released on Feb 22.
US banks with US$100 million to US$1 billion in assets hold 25 per cent of commercial property loans outstanding and 15 per cent of apartment loans, Real Capital data show. The biggest banks, those with more than US$10 billion in assets, hold about half of commercial loans and two-thirds of apartment loans.
'With the concentration of commercial mortgages in small and community banks, there is a potential spillover that will impinge on their ability to make loans to small businesses and families,' Mr Chandan said.
Almost US$1.1 trillion in commercial loans and US$211 billion in apartment loans were held by US banks on Dec 31, according to Real Capital.
The Congressional Oversight Panel on the financial system bailouts said in a Feb 10 report that 'the ultimate impact of the commercial real estate whole loan problem will fall disproportionately on smaller regional and community banks' that have higher concentrations of such loans.
'Some community banks seemed to have abandoned, or never really practised, sound risk management' by lending too much on real estate in their local markets, David Hendler, New York-based analyst for CreditSights Inc, said in a Feb 22 note.
The commercial default rate rose from 3.4 per cent in the third quarter, representing an increase of US$4.5 billion in defaulted loans in the period, according to Real Capital. The rate will reach 5.1 per cent at the end of this year, the research firm said.
The apartment default rate rose from 3.6 per cent in the third quarter. The jump reflected a US$1.6 billion increase in defaulted loans. Apartment defaults will peak at 5.3 per cent at the end of 2010, said Real Capital, which based its analysis on bank filings and data from the Federal Deposit Insurance Corp.
Martin Koh/ Sherry Tang