Commercial Defaults Hit Record for Both Investors and Banks

Pressures continue to drive up commercial mortgage defaults.

The economic downturn has choked off demand for retail and office space, with vacancy rates rising and prospects of new occupants limited by the duress of today’s job market.

At the same time, commercial real estate (CRE) values have dropped more than -40% in some markets, pushing a growing number of property owners severely underwater.

According to new data from Real Capital Analytics, the default rate for commercial real estate loans owned by the nation’s FDIC-insured banks increased from 3.83% in the 4th quarter of 2009 to 4.17% in the 1st quarter of 2010.

Real Capital says this is the highest default rate reported since 1992, the first year for which data is available, when it was 4.55%.

Year-over-year, the default rate is up by 192 basis points. By contrast, at its cyclical low in the first half of 2006, the commercial mortgage default rate was only 0.58%.

As of the 1st quarter of this year, $45.5 billion of bank-held commercial mortgages were in default, according to Real Capital’s tally.

A separate study released this week by Trepp LLC shows that the share of past due loans held by investors in commercial mortgage-backed securities (CMBS), including those already in foreclosure and bank repossessed, jumped 40 basis points in May to 8.42% – the highest in the history of the CMBS industry.

To put the delinquent CMBS universe into perspective, Trepp says that just six months ago, the delinquency rate was 5.65%. One year ago, it was 2.77%.