Commercial, Multifamily Lags With Vacancy, Delinquency, MBA Says
Vacancy and delinquency is rising across commercial property types, although commercial mortgage performance varies depending on the investors, according to a quarterly report (download here) from the Mortgage Bankers Association (MBA) on commercial real estate and multifamily finance. Vacancy among apartments grew from 6.5% to 8.4% in Q309, MBA found (see above chart). That's even after asking rents fell by 6% during the same time frame. Office properties jumped from 16% to 19.4% vacant while retail vacancies swelled from 12.9% to 18.6%. Asking rents fell 9% for office properties and 8% for retail. Delinquency rates continued in Q309 to rise across most commercial and multifamily investor groups, the MBA said. But loans held by life insurance companies and mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) are performing better than those held by banks and thrifts, which are performing on-par with the response to the late-'80s/early-'90s stress. Based on unpaid principal balance, MBA found that commercial mortgage-backed securities (CMBS) were 4.06% delinquent in Q309. Loans held by banks and thrifts were 3.43% delinquent. But those held in life insurance portfolios came in at 0.23% delinquent, loans held by Fannie were 0.62% delinquent and those held by Freddie were 0.11% delinquent. "[T]he fact that the economy – at least as measured by GDP – began to grow during the third quarter may begin the countdown on the 'lag' and on when the economy will have grown sufficiently to rekindle demand for commercial real estate," the MBA said. "Given the depth of the recent downturn, the commercial property market has a significant amount of ground to re-cover." Property sales and building activity also remains depressed. Commercial property sales were 72% lower in 2009 than in 2008. And the relatively small number of transactions are likely to be largely distressed sales, MBA said, as lenders and servicers begin to push distressed assets through to liquidation. Despite recent positive signs that the job market may be on track to begin recovering at a slow pace from significant losses in 2009, there remains a weakness in demand for labor, which stems in part from the difficulty businesses are finding in obtaining credit for operations. Overall, recovery in the commercial and multifamily real estate industry -- and the broader economy -- remains "fragile," MBA noted. As 2010 begins, the risk remains that monetary policy functions of the Federal Reserve may soon be under audit by the Government Accountability Office, and other Fed powers stripped, as financial regulatory reform legislation makes its way through Congress. Although a chief supporter of financial reform in the Senate, Christopher Dodd (D-Conn), might soon be leaving his post, momentum behind the legislation remains. "A central bank that is subject to political pressures will almost inevitably be pushed into following policies that stimulate the economy in the short run, irrespective of the consequences for inflation down the road... which would result in much higher long-term interest rates," the MBA said. "The threats to the Fed’s independence are serious. The US economy will fare better in the long run if Congress retains a strong and independent Federal Reserve." Write to Diana Golobay. The author holds no relevant investment positions.