Commercial Loan Defaults Doubled

The default rate on commercial mortgages held by U.S. banks more than doubled in the second quarter from a year earlier amid falling rents and occupancies for malls, office buildings and warehouses.

Loans that were 90 days or more past due climbed to 2.88% of outstanding balances in the second quarter, from 1.18% a year earlier, according to data released by Real Estate Econometrics LLC. Defaults increased from 2.25% in the first quarter.

"A delinquency may have resolved itself two years ago," said Sam Chandan, the New York property research firm's president and chief economist. "Today, even one missed payment may be more indicative of an underlying problem, so banks have to be very proactive in addressing the issue."

Banks held $1.087 trillion of commercial property loans in the quarter, up from $1.077 trillion in the previous three months. That's almost 15% of all loans and leases held by banks. Defaults are rising both for lenders that hold commercial mortgages and for bondholders in the $700 billion U.S. market for securities backed by commercial mortgages.

The CMBS market accounts for about 22% of the nation's $3.4 trillion in commercial real estate debt, according to the Real Estate Roundtable. Defaults and late payments on loans bundled into CMBS could surpass 7% by the end of this year, the research firm Reis Inc. said in July.

Banks are beginning to recognize that more past-due commercial property loans are unlikely to be paid in full.

Commercial defaults will rise to 4.1% by year's end, a rate last seen in 1993, according to Chandan's forecast.

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