Weakness Persists in Commercial Mortgage Market Even as Tenants Look to Buy
The continued economic pressure on the commercial real estate market -- beleaguered under high unemployment and low occupancy -- is dragging down commercial mortgage performance. But as rental rates continue to decline, real estate companies and tenants see potential to buy commercial property at distressed prices. The performance of commercial mortgages continued to decline among most investor groups in Q4 2009, according to quarterly data from the Mortgage Bankers Association (MBA). The 30+ day delinquency rate on loans held in commercial mortgage-backed securities (CMBS) rose 1.63 percentage points to 5.69%. The 60+ day delinquency rate of multifamily loans held or insured by Fannie Mae (FNM) rose 1 basis point to 0.63%. The 90+ day delinquency rate on multifamily loans held or insured by Freddie Mac (FRE) rose 4 bps to 0.15%: "Delinquency rates are likely to remain under pressure until job and other economic growth returns to levels that will have a material impact on demand for commercial real estate space," MBA said in its report (download here). Originations, like property sales, grew slowly over the year. MBA found commercial and multifamily mortgage originations were 50% higher in Q4 2009 than in Q1 2009 as origination grew. Commercial mortgage debt outstanding fell 1.7% from the previous quarter and is down 2.8% from the same time last year, MBA said. Vacancy rates rose among major property groups, to 19.7% of all office properties in Q409, 19.2% among retail properties and 8.6% of multifamily properties. In the quarter, asking rents dropped 8% for office and retail properties and 6% for multifamily property. Although commercial real estate values and rents are expected to decline further in the near term, the market environment looks ripe for purchase opportunities, according to a Deloitte Financial Advisory Services survey of 327 executives from both real estate companies and tenant renting commercial real estate. “The commercial real estate market continues to be adversely affected by one of the deepest recessions in decades. Increased unemployment has resulted in less demand for office space, reduced rents and an overall decline in commercial property values,” said E.J. Huntley, a principal at Deloitte Financial Advisory Services. “Right now, commercial real estate executives are weighing their options, determining if the time is right to invest while prices remain depressed and before interest rates begin to rise.” Roughly three-quarters (75%) of respondents to the Deloitte survey expect commercial property values and asking rents to shrink this year. Two-thirds of respondents expect full recovery in the market in two to three years, with one-third expecting that recovery in four years or more. In the mean time, buying opportunities exist. Nearly half of respondents said lower prices make buying more financially advantageous than renting, Deloitte said. Half of executives at real estate companies and nearly 40% of tenants renting commercial real estate indicated their companies are already considering potential acquisitions. Maturing commercial mortgage debt remains a significant hurdle to recovery in coming years. Deloitte said 70% of executives responding companies have debt maturing over the next three years on property in real estate portfolios. Two-thirds of these plan to refinance the debt, which might be made difficult under tighter credit conditions. Of those respondents with debt maturing over the next three years, 14% said they planned to raise equity as part of refinancing. Write to Diana Golobay. Disclosure: the author holds no relevant investment position.