Commercial Mortgage Defaults
Could Hit 4.1%, a 17-year High

Slumping rents and a dire shortage of debt available for refinancing could drive the default rate on U.S. commercial mortgages to 4.1 percent by the end of this year, the worst performance in 17 years, research firm Real Estate Econometrics LLC said in a report.

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

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, according to Sam Chandan, chief economist of Real Estate Econometrics. Commercial defaults already are at a 15-year high after climbing to 2.3 percent in the first quarter, or $3 billion, from 1.6 percent at the end of 2008, according to the firm’s analysis of Federal Deposit Insurance Corp. data.

Real Estate Econometrics  said that default rates likely will increase next year and in 2011 as five-year loans made in 2005 and later start to come due. 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.

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