Commercial Real Estate Continued to Struggle in 2nd Quarter

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Although there was some improvement in residential mortgage delinquencies during the second quarter, commercial mortgages continued to have trouble. In particular, the delinquencies of commercial mortgages packaged and sliced up into securities (CMBS) soared. They rose to 8.22% from 6.83% in Q1, according to the Mortgage Bankers Association (.pdf). Other measures leveled off a bit, but showed little improvement.

Here's a chart based on the MBA report:

cre delinq 2010-q2.png

It's a little hard to compare these measures, but there are a few things to note.

First, the three data series shown reflect different sorts of portfolios. The CMBS (green line) portfolio includes a diverse universe of commercial real estate. The Fannie Mae Multi-Family (yellow line) includes mortgages backing only those sorts of structures, which excludes business. The Bank and Thrift portfolio (red line) consists of a fairly diverse population as well. According to MBA, bout half that portfolio consists of "owner-occupied" commercial loans, which are supported by the income of the resident business rather than by rent and lease payments. One potential explanation for the variances between CMBS and the other two portfolios is that loans more likely to default were packaged into CMBS, while higher quality loans were held by Fannie and banks. Given their characteristics, this theory makes sense.

Second, as you probably noticed, the CMBS delinquencies (green line) are very ugly. This is the highest rate of commercial delinquency for this series since the MBA began keeping record in 1997. The data includes relatively early-stage delinquencies, unlike the other two measures. While it's unclear how each stage of delinquency is changing within the portfolio, considering that the other two series that are limited to later stages of delinquency are virtually flat from Q1 to Q2, it's plausible that earlier-stage delinquencies are a factor driving the increase. If that's the case, then commercial real estate might be experiencing a similar trend to housing, where we recently saw that early-stage delinquencies were increasing while later-stage delinquencies were performing better. Like some Americans, some businesses might be feeling a renewed squeeze as the recovery struggles.

Lastly, one major difference between the CMBS delinquencies and the other two lines shown is that the CMBS data include real-estate owned properties, while the others do not. Since some of those foreclosed properties are taken out of the other two measures, their delinquency rates might have been higher if those loans were included. Indeed, if banks are more aggressively wrapping up the default process, then this would exaggerate the difference even more. This is one of the reasons it's hard to really compare the three series to one another.

Although this data is a little bit stale by now, as we enter the latter part of the third quarter, it's troubling to see that commercial real estate continued to struggle in Q2. This can likely be blamed on the slowness of the recovery catching up with more businesses and unemployment causing vacancies and missed rent payments. Since neither of those trends appear to be changing much, it's probably unlikely that we'll see a sudden improvement in commercial mortgage delinquencies through the end of 2010. In fact, if early stage delinquencies are ramping up, then later stage delinquencies could increase going forward.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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