Thursday, January 08, 2009

Commercial Real Estate Delinquency Rates Soar

Delinquencies on mortgages for hotels, shopping malls and office buildings were sharply higher in the fourth quarter.

New data from Deutsche Bank show that delinquencies on commercial mortgages packaged and sold as bonds, which represent nearly a third of the commercial real-estate debt market, nearly doubled during the past three months, to about 1.2%. A weaker economy threatens to cause losses for investors in this $3.4 trillion market.

The share of commercial real estate loans in smaller banks (below the top 100) has been rising steadily over the last decade rising in some banks to 50 percent of portfolio. A crunch in the commercial real estate markets could remind people of the S and L debacle of the 1980s. Southeast and California savings and loans loaded up on real estate and when these investments proved to be uneconomical most of these banks failed. There could be storm clouds on the horizon.

While I am not forecasting impending doom, if you are invested in small and regional banks you would be wise to look at the portfolios of those financial institutions. If the bank portfolio is heavily weighted in commercial real estate loans or commercial mortgages this should be viewed as a red flag.

Delinquency rates on these kinds of loans are forecast to rise in the year ahead. It is unlikely that the markets has discounted this news. Most of the focus has been on "other things".

If you have a subscription to the Wall Stree Journal you should read this article,

Commercial Property Loses Shelter

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