If you work in commercial real estate, best to forget all that talk about an imminent economic recovery. The sad truth is that while the rest of the economy shows early signs of improvement, commercial real estate is proving the laggard.
Data released by research firm Real Estate Econometrics indicates that, nationwide, commercial and multifamily mortgage defaults will peak sometime around 2010 or 2011. The thing is, that peak will look more like a plateau than a treacherous mountain acme, with sizeable numbers of defaults lasting well into 2013. By the time Obama’s second term rolls around – or Sarah Palin succeeds him – commercial real estate will still have issues.
“There’s a lag between what’s going on in the broader economy and what’s happening with property cash flows,” said Sam Chandan, the president and chief economist of Econometrics.
Indeed, in the first quarter of 2009, more than a year after the recession began, a mere 2.25 percent of commercial mortgages and 2.45 percent of multifamily mortgages defaulted, according to data gleaned from nearly 8,200 American banks whose deposits are FDIC-insured.
In the second quarter of this year, those numbers rose to 2.88 percent and 3.13 percent, respectively.
In the fourth quarter of this year, Real Estate Econometrics forecasts that 4.1 percent of commercial mortgages and 4.5 percent of multifamily mortgages will default. Defaults should peak sometime in 2010 or 2011, with 5.2 percent of commercial mortgages and 5.5 percent of multifamily defaulting in the fourth quarter of 2010; and 5.3 percent of commercial mortgages and 5.1 percent of multifamily defaulting in the fourth quarter of 2011. In the fourth quarter of 2013, those numbers should fall to 4.6 percent and 4 percent, respectively.
What’s causing these defaults?
“Up until about last September, the real driver of defaults in the market was refinancing issues,” Mr. Chandan said. “Since then, there’s been a more significant deterioration in the underlying fundamentals of the properties. That diverges from the expectations that were embedded in the underwriting when the loans were made.”
In other words, borrowers are having trouble paying the interest on their debt, because the cash flow in their properties has dropped off.
“That’s a situation that will grow more serious over the course of the next year or more.”