U.S. Commercial Real Estate Outlook Deteriorates

The outlook for commercial real estate continues to worsen as the sector is still deteriorating and will continue (unfortunately) to deteriorate for sometime to come. The volume of commercial mortgages at risk of default has quintupled since the beginning of fiscal 2008, the Financial Times reported on Tuesday.

From FT: …Special servicers, companies that collect payments from borrowers in distress on behalf of mortgage bond investors, reported $23.7bn of mortgages under their care at the end of the first quarter, according to Fitch Ratings….That was five times higher than the $4.6bn of mortgages needing special servicing at the end of 2007.

“Commercial real estate is in a world of hurt and will be for at least the next two years,” said Ross Smotrich, analyst at Barclays Capital. “This is a capital intensive business in which lending capacity has diminished because of the absence of securitisation, while the fundamentals are driven by the overall economy so both occupancy and rents are declining.”

At the end of the first quarter, defaults and payments more than 60 days late were at 1.53 per cent of outstanding mortgages. Fitch said they could reach 4 per cent by the end of 2010.

From the Fed February 2009 minutes:
A number of participants expressed concern that the commercial real estate sector could deteriorate sharply in the months ahead. They noted that a large number of commercial real estate mortgages will come due at a time when banks likely will still be facing balance-sheet constraints, the ability to securitize commercial real estate mortgages may remain severely restricted, and vacancy rates in commercial properties could well be climbing. Some participants worried that the outcome could be an increase in defaults on commercial real estate mortgages and forced sales of commercial properties, which could push prices down further and generate additional losses on banks’ commercial real estate loan portfolios.

CRE values in the U.S. have fallen more than 30% from the 2007 peak as cheap financing disappeared and the recession reduced occupancies.

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