A new report from Real Estate Econometrics reveals a continuing strain on the commercial mortgage market. Projections from the firm are that past due and non-accrual loan balances on commercial mortgages will more than double from the end of 2008 to the end of 2009. The firm also expects the national default rate for commercial real estate mortgages held by depository institutions to rise from 2.3 percent in the first quarter to 4.1 percent in the fourth quarter of 2009. It will continue to rise to 5.2 percent by the end of 2010 and peak at 5.3 percent at the end of 2011 before falling. This projection is based on the sharp increase in the balance of delinquent loans over the last two quarters.

According to the report:

Evidence of increasing strain in the commercial mortgage market is apparent in the rising national default rate. Credit standards continue to tighten, with the result that even good credit borrowers seeking to refinance seasoned mortgages with healthy loan-to-value and debt service ratios are in many cases unable to secure new financing. At the same time, the dramatic decline in real economic activity and labor markets since last September has undercut property fundamentals, increasing the number of recently-originated loans that are at risk for delinquency and default because of cash flows' falling short of principal and interest obligations. Driving the increase in the default rate into 2011 and 2012 — after the economy has resumed a growth trajectory —many loans originated in 2006 and 2007 are unlikely to meet the aggressive cash flow projections embedded in their underwriting assumptions at the point of origination.


While reasonable questions are still being raised about the efficacy and fairness of some federal programs that have been undertaken to restore stability to the economy and the financial system, the challenges facing commercial real estate warrant immediate action. The window of opportunity for policy intervention to enhance liquidity in the commercial real estate mortgage market, so as to mitigate the full extent of the projected increase in default rates, is closing.

Overall, the national default rate for commercial real estate mortgages held by depository institutions rose from 1.62 percent in the fourth quarter of 2008 to 2.25 percent in the first quarter of 2009, according to Real Estate Econometrics analysis of data published by the FDIC. The 63 basis point rise in the default rate is the largest one-quarter increase since at least 1992.

The balance of commercial mortgage loans 90 days or more past due increased from $2.2 billion in the fourth quarter of 2008 to $3.0 billion in the first quarter of 2009. Meanwhile, the balance of delinquent commercial mortgages (30 to 89 days past due) increased from $11.4 billion to $14.7 billion. This is an 84.3 percent jump over the same period last year.