According to Standard and Poors there is no end in sight for the commercial real estate debacle. S&P says:
the recession appears to be affecting all commercial real estate property sectors, and we believe job losses, reduced consumer spending, and the rapid decline in wealth have reduced demand for commercial real estate space. In our opinion, the confluence of these negative events combined in the first quarter of 2009 to drive vacancy rates higher for all of the major property types. Consequently, the performance of the collateral backing Standard & Poor’s Ratings Services rated commercial mortgage-backed securities (CMBS) continues to show signs of stress, as property fundamentals weaken and credit conditions remain difficult. The CMBS delinquency rate is now only 11 basis points away from its peak of 1.96%, which was recorded in December 2003.
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Significant credit contraction has, in our view, all but eliminated viable refinancing options. As a result, loan transfers to special servicing are on the rise as borrowers give servicers notice that they will not be able to refinance at maturity. First-quarter payoffs for maturing fixed-rate loans were 55.45%, significantly down from 83.37% in fourth-quarter 2008. The loss severity rate increased in the quarter, as capital remains on the sidelines and distressed asset sales may have taken place.
Not surprisingly, we’re seeing the same thing in the CMBS market:
Commercial Real Estate isn’t the next shoe to drop as many say, it is falling as we speak.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.