Commercial mortgage default rate in the US more than doubles

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% 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% from 1.6% a year earlier, the New York-based real estate research firm said on Feb 23 in a report. The default rate for loans on apartment buildings climbed to 4.4% from 1.8%.

“The level of distress continues to rise irrespective of improving economic trends,” Sam Chandan, Real Capital’s global chief economist, said in a telephone interview.

The US jobless rate declined to 9.7% in January from 10% in December, after hitting a 26-year high of 10.1% in October. Unemployment and tighter credit are hurting commercial property values, which fell 29% in December from a year earlier and are down 41% from the October 2007 peak, according to the Moody’s/REAL Commercial Property Price Index released Feb 22.

US banks with US$100 million (RM341 million) to $1 billion in assets hold 25 percent of commercial property loans outstanding and 15% of apartment loans, Real Capital data shows. 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,” 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. – Bloomberg LP