Economic Update – CRE Defaults Head for High Ground

A new report by Real Estate Econometrics, based on FDIC data, puts the commercial real estate loan default rate at its highest level in more than a decade and a half, at least those loans held by regulated deposit-taking institutions—banks and thrifts, for the most part. The default rate soared from 1.62 percent in the last quarter of 2008 to 2.25 percent in the first quarter of 2009. That rate doesn’t include defaults on loans associated with multi-family rental properties, which Real Estate Econometrics put at 2.45 percent in the first quarter of 2009, up 68 basis points from the previous quarter.The jump brings the commercial real estate default rate to its highest level since 1994, when the industry was last emerging from a severe downturn. There’s no indication this time around, however, that the industry is coming out of its troubles anytime soon. In fact, Real Estate Econometrics forecasts defaults to reach 5.2 percent by the end of 2010. Currently banks and thrifts hold about half of all commercial real estate debt, representing about $1.6 trillion worth of outstanding loans. A major component of that total, roughly a quarter, is in the form of CMBS. A large share of the most troublesome loans—those at highest risk of default—were originated in 2006 and the first half of 2007, now known to be the most distended period of the real estate bubble, but back then still considered “let the good times roll.” Like so many Vegas McMansions, many of these commercial properties were valued far too highly in those days, and are now underwater.“Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate,” said the Real Estate Econometrics report. That, and the properties are underwater. Big banks are lined up at the door of TARP, waiting to get out, according to the U.S. Treasury Department on Tuesday. Ten specific big banks, that is, and while the government did not say which ones they were, Chicago-based Northern Trust said it was one of them, and others likely include the biggest TARP recipients: JP Morgan Chase, Goldman Sachs, Morgan Stanley and that ilk. If all the banks on the government’s short list were allowed to return their TARP funds, that would represent an influx of about $68 billion to the treasury (fully $25 billion of that would be from JP Morgan Chase, if indeed it’s on the list). So far a number of banks have been allowed to return TARP funds by the Treasury Department, but only relatively small community banks.American retailers aren’t the only ones suffering from the worldwide economic downturn. German retail owner Arcandor, which owns the Karstadt chain of department stores in that country (as well as a controlling interest in Thomas Cook), has filed for bankruptcy after two requests for aid were turned down by the BRD government. The company had said that it needed help in the form of government guaranteed loans by Wednesday to renew credit lines totaling €710 million ($999 million), which would have kept it going for the next six months. Nein, said the government.Wall Street turned in mixed results on Tuesday. The Dow Jones Industrial Average ended down 1.43 points, or 0.02 percent, while the S&P 500 was up 0.35 percent, and the Nasdaq gained 0.96 percent.