CMBS Defaults,
Delinquencies May Top 7% By Year-End, Reis Says
By Hui-yong Yu
July 30 (Bloomberg) -- Defaults and late payments on loans bundled into commercial mortgage-backed securities could surpass 7 percent by the end of this year, as falling rental income and scarce credit make it harder for borrowers to pay debt, research firm Reis Inc. said.
The last time overall commercial delinquency rates broke 6 percent was in 1991, following the savings and loan crisis, according to Reis.
“It would not be surprising to see delinquency rates rise past 7 percent by the end of the year,” Reis analysts Christopher Stanley and Kyle McLaughlin wrote in the firm’s quarterly CMBS report. “Downward pressure on net operating income and declining property values continue to make refinancing for existing loans a challenge.”
The credit crisis and recession are reducing occupancies and rents for apartment buildings, offices, shopping malls, warehouses and hotels, boosting defaults in the $700 billion U.S. market for CMBS. Commercial mortgage-backed securities account for about 22 percent of the nation’s $3.4 trillion in commercial real estate debt, according to the Real Estate Roundtable.
Defaults and delinquencies rose to 2.99 percent of outstanding balances in the second quarter, from 1.8 percent in the first quarter and 0.66 percent a year earlier, Reis said.
“Weakness was pervasive across all sectors,” the firm said. Hotels led, with a default and delinquency rate of 4.56 percent, more than double the 2.02 percent in the first quarter. Red Roof Inns Inc. defaulted on four loans totaling about $361 million, according to Reis.
Detroit had the highest default and delinquency rate among the 30 largest cities, at 11.4 percent, up from 5.77 percent in the first quarter, said Reis. Cleveland was second at 7.86 percent, up from 6.8 percent in the first quarter.
Lembi Default
San Francisco had one of the biggest increases in late payments because the city’s largest apartment landlord, closely held Lembi Group, defaulted on about $300 million of loans. That pushed San Francisco’s default and delinquency rate up to 5.15 percent from 0.7 percent in the first quarter, Reis said. For San Francisco apartment loans, the default and delinquency rate was 21.7 percent.
Loans made in 2006 and 2005 had the highest proportion of late payments: 4.29 percent in 2006 and 4.05 percent in 2005, Reis said. Many loans made during those years relied on projected rent increases, known as “pro forma lending” rather than the traditional commercial mortgage formula that limited debt on a property to a multiple of its current rental income.
“Even loans originated in 2003 and 2004 are exhibiting weakness, with rates over 3 percent,” the firm said. “This suggests the far-reaching nature of the current decline in performance, affecting even issuances with relatively tight underwriting standards.”
S&L Crisis
In 1991, the CMBS market consisted of about $3.1 billion in commercial mortgage-backed securities, according to data compiled by Bloomberg. That’s less than 1 percent of today’s volume.
A loan is delinquent when it’s 30 to 89 days past due and in default when 90 or more days late.
To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net.
Last Updated: July 30, 2009 16:18 EDT
bloomberg.com
CRACKER |
