US Commercial Real Estate Loan Defaults at Six Year Low

Posted on 26 April, 2015 by Jodee Redmond

Default rates on US commercial real estate loans that back complex bonds slipped to a six-year low in 2014, as a combination of lower borrowing costs and the economic recovery helped to keep the market afloat, the FT reports.

The Statue of Liberty and Lower Manhattan Skylines New York City

Defaults on commercial mortgage-backed securities (CMBS) climbed at a steady rate in the wake of the financial crisis, but the number and value of defaults on loans underpinning US CMBS – which are typically offices, hotels and shopping malls – have been in a steady decline since 2010. Last year, they dropped 28 per cent from the year before to $3.9 billion, according to figures compiled by Fitch Ratings.

As a percentage of the total outstanding, the annual default rate dropped from 0.9 per cent in 2013 to 0.6 per cent in 2014. This figure represents the lowest level since 2008, according to Fitch Ratings’ annual report on the US CMBS market, which was released recently.

Issuance has also increased this year and is expected to hit $110 billion, an increase of $20 billion from 2014, according to Barclays.

Fitch Ratings did notice some possible obstacles coming up, and cited a likely rise in interest rates from the Federal Reserve as one of the challenges ahead.

The ratings agency also mentioned a “refinance wall” of loans which were first extended in 2005-07 as a possible cause for some concern.

Most of these loans are still current and could be refinanced at lower interest rates when they become due, but if the Fed raises rates faster or at a greater rate than expected, it could “prove problematic,” the agency pointed out.

The list of loans in default noted by the ratings agency consists almost exclusively of those structured in the years 2005-07, representing the peak of the credit bubble in the pre-crisis period.

At that time, lending standards were at their lowest point. These older loans account for close to 90 per cent of all the CMBS loan defaults on the list tallied by the rating agency.

It is predicted there will be a modest increase in the number of CMBS defaults in 2016 and 2017 when some of the more aggressive, leveraged deals that were structured at the peak of the bubble are due for repayment.




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