It wasn’t all that long ago that the media and banking industry commentators would worry about the coming train wreck in commercial real estate. But peculiarly, that topic has more or less receded from view. It appears the public has only so much interest in banking stories, and the frenzied coverage of financial services non-reform plus eurozone sovereign debt woes, which are really eurozone bank woes, took center stage.
But as predicted, the decay in the commercial real estate loans continues at an impressive pace. This isn’t quite the disaster in the making that subprime was. CMBS is a smaller market and its defaults, while stunning in relationship to historical norms, are not expected, even in a worse case scenario, to reach the same level.
RealPoint’s monthly delinquency report for July (hat tip Richard Smith) shows how rapidly conditions are deteriorating:
• All deals seasoned at least a year have a total unpaid balance of $767.76 billion, with $60.45 billion delinquent – a 7.87% rate (up from only 5.28% six months prior).
• When agency CMBS deals are removed from the equation, deals seasoned at least a year have a total unpaid balance of $736.75 billion, with $60.39 billion delinquent – a 8.2% rate (up from only 5.46% six months prior).
• Conduit and fusion deals seasoned at least a year have a total unpaid balance of $655.41 billion, with $54.69 billion delinquent – a 8.35% rate (up from only 5.33% six months prior). (emphasis theirs)
Note loss severities have increased too, and now stand at 49% (which is really bifurcated; some properties are resolved at or barely under par values, while the rest averages loss severities of roughly 58%).
Deals that are performing are not necessarily out of the woods. CRE loans typically have large balloons; the expectation is that a mature property with a decent rent roll can refi. Wellie, that isn’t a given now, since funds for refis are scarce.
The report is chock full of data, but there is no good news here, only shades of bad. As Richard Smith observed, “I’m not sure why people say there isn’t a CRE crash. It’s just happening in slow motion, so far.”