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One
recent mainstream media report claims that the worst may be over for for commercial real estate.
Another asks: "Wasn't commercial real estate supposed to crash?" Still
another goes so far as to say that CRE
is gaining strength.
Personally,
I think the following Atlantic
article, "Commercial Mortgage Delinquencies Continued to Soar in
Q1" lends further weight to my previous
remarks that CRE is a "tsunami unfolding":
Commercial
real estate was the looming problem that everybody seemed to forget about in
early 2010. New delinquency data from the first quarter shows that it's time
for a reminder. Delinquencies soared in the early part of the year, according
to the Mortgage Bankers Association. Loans contained
in commercial mortgage-backed securities (CMBS) 30-or-more days delinquent
reached a new high of 7.24% last quarter -- up substantially from 5.70% in
the fourth quarter of 2009. This marks another sobering economic indicator.
Here's
a chart based on some figures the MBA's report provides:
Let's
start with the green line -- 30+ day delinquencies. As noted, those continue
to rise -- a lot. In the past year, they've risen from 1.86% to 7.24%. That's
incredible. Businesses are still clearly having big trouble paying their
mortgages.
But
how severe is the problem? The first stage of delinquency isn't good, but it
isn't yet reason to panic. Unfortunately, the later stage delinquencies appear
to be rising as well. The measure of 60+ day delinquencies shown (gold line)
is that for Fannie Mae's portfolio of multi-family loans it holds or insures.
It's up to 0.79%, which is also a big increase from its rate of 0.34% from a
year ago. And remember, if Fannie owns a loan, then it should be relatively
pristine. Yet, these delinquencies are rising too.
The
data for 90+ day delinquencies shown (red line) consists of loans in the
portfolios of banks and thrifts. Any loan that's more than 90 days delinquent
is probably defaulted. The portion of defaulted commercial real estate loans
in bank portfolios is alarmingly high at 4.24%. It's nearly double the 2.28%
rate seen a year earlier.
What's
going on here? The MBA says:
"Weakness in
the economy has continued to weigh on commercial properties, which in turn
weighs on the mortgages they back," said Jamie Woodwell, MBA's Vice
President of Commercial Real Estate Research. "Economic growth,
specifically in areas of jobs and consumer spending, will be key to stabilizing
the commercial property and mortgage markets going forward."
Right,
but didn't things pick up a little by the end of the first quarter? Remember
all those great earnings announcements? Consumers also began to open their wallets again, as
spending rebounded in March. Yet, commercial real estate continued to
deteriorate. Clearly, the recovery will need to strengthen significantly to
turn around the performance of these loans.
Michael
J. Panzner
Editor, Financialarmageddon.com
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the
author of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.
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