Commercial Real Estate Clouded by Delinquencies

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Barely a few minutes after reading an article in the Wall Street Journal about banks finally opening the "spigot for commercial real-estate,"the folks over at Trepp issued their monthly report on the delinquency rate for commercial mortgage backed securities (CMBS); let's just say it isn't good.

After two months of very minimal rate increases, the number jumped in April, 23 basis points, to 9.65 percent, "the highest reading in the history of the CMBS market," according to Trepp.

To say the recovery is, as the report notes, "bumpy," is putting it mildly. The rate should be going down for two reasons:

First, as new CMBS deals, which are generally current loans, are added to the pool of all CMBS loans, the larger denominator in itself should push the rate down. Second, "special servicers have been resolving a greater number of troubled legacy CMBS loans than they were 18 months ago," according to Trepp. And yet the rate goes higher.

So now the balance of delinquent loans exceeds $62.8 billion, up from $61.5 billion in March.

Just a year ago, the delinquency rate was just 8.02 percent. Multi-family, industrial and retail delinquencies are leading the way up, despite the fact that apartment rents and demand are soaring and retail is supposedly recovering. The trouble is these properties just aren't worth what they were when the loans were made, and so they can't be refinanced, which happens with commercial loans far more often than with residential loans.

This is precisely the reason many in the industry don't see a healthy recovery in commercial real estate, even as some of the top urban markets are faring quite well.

"It's all about jobs," said Real Estate Roundtable President and CEO Jeffrey DeBoer in the latest quarterly "Sentiment Survey" of senior commercial real estate executives.

"Individual segments of the market may be recovering, but until private sector job creation picks up, we will not be out of the economic danger zone. The huge pipeline of maturing commercial mortgages and large fiscal issues facing state and local governments are additional 'headwinds' that could impact recovery in the broader economy and commercial real estate. The flatter trajectory we're seeing in the Q2 Sentiment Index is a reflection of these ongoing economic risks and uncertainty."

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