Commercial RE Braces For a Surge in Defaults

Q109 racked up $2.6bn in US commercial mortgaged-back security (CMBS) loan defaults, compared to $3.2bn for all of 2008, signaling an expedited pace in commercial mortgage defaults is upon the industry, according to Fitch Ratings data released Thursday. “If the rate of defaults continue at this accelerated pace combined with limited issuance in 2009, the cumulative default rate will exceed 5% by year end,” says Fitch managing director Mary MacNeill. Multifamily properties and retail spaces are expected to lead defaults in 2009, both of which experienced high default rates in 2008. Multifamily spaces accounted for $1.06bn in new defaults and posted a 5.21% default rate in 2008, while retail defaults hit $1.03bn with a default rate of 2.52%. As of year-end 2008, the cumulative default rate increased to 3.29% from 2.71% in 2007. Fitch says it expects the rate of defaults in 2009 to increase consistent with the levels of defaults in recent months, as the slow economy and lack of financing further stress loan performance. So even though residential markets may see signs of recovery, the worst may lie ahead for the commercial sector. The 2006 vintage had the highest dollar balance and number of commercial defaults in 2008 with $742.9 billion and 78 loans. But Fitch says loan defaults among 2007 CMBS transactions will lead all other vintages by year end as larger loans within these deals have begun to default in late 2008 and early 2009. In a separate report Thursday, the Mortgage Bankers Association said commercial and multi-family mortgage origination volume in Q109 slipped 26% from the previous quarter and sits 70% below the reading a year ago. A drop in CMBS conduit loans led the overall decline in origination, the MBA said, plunging 96% year-over-year. The government agreed to lend a helping hand to the commercial real estate market, effective in June. After aiding residential markets, the Federal Reserve decided in early May CMBS will also be eligible collateral for TALF participation. The decision to incorporate CMBS into the TALF program, aims to stimulate lending in the commercial real estate sector by allowing private investors to purchase securities with a matching government investment. Write to Kelly Curran.

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