U.S. Borrowers Falling Behind on Commercial Real Estate Loans

By Alex Finkelstein

It’s not a pretty picture. Numerous borrowers who took out commercial real estate loans in 2007 find themselves defaulting on the payback today, according to the latest research from New York City-based Trepp LLC.  Here is what Trepp found:

• The delinquency rate for U.S. commercial real estate loans in commercial mortgage-backed securities (CMBS) jumped 31 basis points in March to 9.68%.  The value of delinquent loans is now $58.1 billion.
• Newly delinquent loans–over $5 billion in total–put 91 basis points of upward pressure on the rate.
• Multifamily and Office loans were the worst performing property types with each suffering significant losses.
• The Office delinquency rate was up 37 basis points, setting a new all-time high of 9.41%.
• The Hotel delinquency rate dropped 42 basis points and was the only major property type to improve.

“We predicted late last year that the delinquency rate would rise largely on the impact of 2007 loans coming due, and today’s report underscores that forecast,” says Manus Clancy, senior managing director at Trepp

“After the rate fell nicely in January and February, we were cautiously hopeful that we’d be wrong.  This month’s report shows that the market has a lot of wood to cut and that a rate north of 10% can’t be ruled out.”

For the second straight month, loss resolutions were relatively modest, Clancy says. At about $1 billion, the number was lower than what the CMBS market has been seeing in recent months.

The removal of these loans from the delinquent loan category attributed about 15 basis points of downward pressure on the delinquency rate, according to the Trepp report.  Loans that were cured in March put an additional 43 basis points of downward pressure on the rate.

In the banking sector, Trepp data found:

• Five banks failed in March, up slightly from four in February.
• The overall pace of closures has slowed since 2011, with 16 failures in the first quarter of 2012, as compared to 18 in the fourth quarter and 26 in the third quarter of 2011.
• Commercial real estate exposure was the main driver behind problem loans for the banks that failed in March, comprising $167.6 million (81.6%) of the total $205.4 in non-performing loans at the failed banks.
• Commercial mortgages accounted for $123.7 million (60.2%), while construction and land loans were $43.9 million (21.4%) of the non-performing total.
• Residential mortgages were a distant second, with $19.6 million (9.5%) of the total nonperforming loans.
• C&I loans contributed $17.5 million (8.5%) of the nonperforming total.
• Other nonperforming loans, including unsecured consumer loans, totaled $0.7 million (0.3%).

Read entire World Property Channel article here:

Summary:  Bad debt is coming home to roost.  5 to 7 year loans are coming due now and may weigh on the commercial real estate market.  Good news for some areas is that many institutional investors are cash heavy and looking for deals.  That may help ease the burden as this bad debt cycles through.