Commercial Mortgage Defaults Projected To Rise

New York, NY, June 9, 2009--The default rate on commercial mortgages held by U.S. banks could rise to a 17-year high later this year, according to New York property research firm Real Estate Econometrics.

The firm said debt for refinancing remains scarce and the recession is continuing to depress rents.

The rate is likely to reach 4.1 percent by year-end, the firm said.

“The dramatic decline in real economic activity and labor markets since last September has undercut property fundamentals,” wrote Sam Chandan, chief economist of Real Estate Econometrics.

The projection implies defaults on about $44.3 billion of commercial mortgages, based on the $1.08 trillion of such loans held by U.S. banks in the first quarter.

The projection for this year would match the 4.1 percent rate seen in 1993 and be the highest since defaults reached 4.6 percent in 1992 during the savings and loan crisis, when the U.S. created the Resolution Trust Corp. to deal with bad loans, according to Real Estate Econometrics.

The first-quarter rate was the highest since 1994, when 2.7 percent of commercial mortgages defaulted, the company said.

Default rates likely will increase next year and in 2011 as five-year loans made in 2005 and later start to come due, Real Estate Econometrics said. Those mortgages were based on overly optimistic forecasts of income growth and inflated property values.

The company projects the default rate on commercial mortgages will reach 5.2 percent by the end of 2010 and peak at 5.3 percent in 2011 before starting to decline.