News:  Commercial Real Estate Defaults Double as Values Continue to Fall

Disheartening news continues to be coming true for the already teetering housing industry.  Real Estate Econometrics LLC says commercial mortgage default rate on loans held by U.S. banks more than doubled to 3.4% in the third quarter as vacancies rose and rents declined.

Defaults climbed from 1.37% a year earlier and from 2.88% in the second quarter, the New York-based property research firm said today in a report.   Default rates in the first three quarters of 2009 have been the highest since 1993, the firm said.

“Mortgages originated in 2006 and 2007 are experiencing the most significant shortfalls in current cash flow relative to current debt-service obligations,” Sam Chandan, chief economist of the firm, said in the report.

Federal Reserve Chairman Ben S. Bernanke said in a Nov. 16 speech that “the fallout” for banks from commercial real estate could slow the nation’s economic recovery.

Defaults on bank-owned commercial property mortgages posted the biggest quarterly jump from the previous quarter in six years of FDIC data analyzed by Real Estate Eco nometrics.

The St. Louis Refinancing Group news team learned that values of commercial real estate will continue to fall before a slight rebound and a gradual recovery, according to a new report from Moody’s Investor Service.

Commercial property values fell 42.9% from their peak in October 2007 and will remain stunted far longer than cash flows, according to the report.  Analysts further predict that values will decline 45% to 55% from that peak in months ahead.

“We believe that valuations will rebound off the bottom and settle in for the longer term at levels 30%-40% below the market top as liquidity and investors return to the sector and property cash flows begin to recover,” said Nick Levidy, Moody’s managing director.

Analysts at Moody’s see cash flows that back commercial mortgage-backed securities (CMBS) will recover slowly over the next several years.

However, refinancing risk on CMBS will grow as maturities near on bonds issued during that 2007 peak.  Moody’s anticipates downgrades of up to three levels for many tranches of 2006 to 2008 vintage CMBS, but ratings on the most senior bonds should remain at current levels.

“Cash flows for properties with short-term lease structures, such as hotels and multifamily, will likely hit bottom in 2010 or early 2011,” said Levidy.  “The bottom for office, retail and industrial properties will take longer to form.”

As gloom and doom seems to be hitting the commercial market, the St. Louis Refinancing Group news team advises commercial business owners with properties adjusting in 2010 to call Liberty Lending Consultants.

Steve Swan and Doug Stahlschmidt will give you the personalized service needed to help refinance your commercial loan or perhaps help get you the business financing you need.  They can be reached at 314-698-4092.

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