Commercial Mortgage Defaults Up, and You Ain't Seen Nothin' Yet!


Empty Office BuildingSince HousingWatch began, many of us have written about what some experts fear will be the next big real estate crisis: the anticipated (dreaded?) implosion of the commercial real estate market. So, this bit of news from Real Capital Analytics ought not to come as a surprise.

For the fourth quarter of 2009, the commercial mortgage default rate in the United States doubled! Well, to be totally honest, it more than doubled, but I guess I was trying to ease the blow somewhat.

But since we're now being absolutely honest with one another, the figures show the commercial default rate surged from 1.6 percent a year before, to 3.8 percent for the period covered by this latest report. We're talking, by the way, about loans for things such as retail space, offices, hotels--just about anything that is not considered residential.

Now, if you've been paying close attention these last few months, you also know that if commercial real estate goes bang, smaller banks (you know, the ones not exactly "too-big-to-fail") will likely be swirling atop that mushroom cloud.

Sure enough, Real Capital's global chief economist, Sam Chandan, tells Bloomberg, "With the concentration of commercial mortgages in small and community banks, there is a potential spillover that will impinge on their ability to make loans to small businesses and families."

I must admit, I like that. "...a potential spillover that will impinge on their ability to make loans to small businesses and families." In other words, once again, guess who gets screwed? You got it. You and me! First, the big guys did it to us--Chase and Bank of America and Wells Fargo and ...well, the list goes on, but you know the rest I'm sure.

Now, if commercial real estate implodes and "spillover" impinges on smaller banks, and smaller banks say to you or your neighbor or, hell, even me, "Sorry, we just can't give you that loan now" -- guess what happens to that so-called economic "recovery" we are supposedly in the midst of? Yep. It will vanish faster than the last Will Ferrell movie.

What was it called???

Real Capital Analytics is predicting that the commercial mortgage default rate may reach as high as 5.4 percent by the end of 2011. Always nice to have something to look forward to, isn't it?

Charles Feldman is a journalist, media consultant and co-author of the book, "No Time to Think: The Menace of Media Speed and the 24-hour News Cycle." He has written about real estate related issues for several years.

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