Commercial real estate continues to be slammed by the economic downturn, evidenced by the record high 9.2% of commercial mortgages that have gone into delinquency, HousingWire reports:
The delinquency rate on commercial mortgage-backed securities reached 9.2% in December, the highest on record, according to analytics firm Trepp.
When the delinquencies dipped in October, analysts began anticipating a continued recovery, but the rate jumped 35 basis points in November and another 27 bps in December. A total of $61.5 billion in commercial mortgages are either more than 30 days delinquent, in foreclosure or REO as of December, up from just over $60 billion the month before.
Source: Realpoint
To soften the blow to their balance sheets, banks have been extending low-interest loans to abandoned commercial developments, according to the WSJ:
A big push by banks in recent months to modify such loans—by stretching out maturities or allowing below-market interest rates—has slowed a spike in defaults. It also has helped preserve banks' capital, by keeping some dicey loans classified as "performing" and thus minimizing the amount of cash banks must set aside in reserves for future losses.
Restructurings of nonresidential loans stood at $23.9 billion at the end of the first quarter, more than three times the level a year earlier and seven times the level two years earlier. While not all were for commercial real estate, the total makes clear that large numbers of commercial-property borrowers got some leeway.
But the practice is creating uncertainties about the health of both the commercial-property market and some banks. The concern is that rampant modification of souring loans masks the true scope of the commercial property market weakness, as well as the damage ultimately in store for bank balance sheets.
The commercial real estate plague will continue to worsen in 2011 as the balance of maturing loans increases by 40%, before nearly doubling by 2012.
Some investors argue that the only way to cure the ailing real estate market is to let prices fall to levels at which businesses can be competitive. While this would force banks to take losses, it could create room for small companies to grow.
Currently, banks are able to issue "evergreen loans", putting off the day of reckoning by leveraging free revolving credit from the Federal Reserve. However, they will be forced to take a hit as soon as interest rates rise. In the next three years, $1.4 trillion in CRE loans are scheduled to expire, the Financial Times reveals.
For one dirty secret in the financial world is that the lack of drama in the CRE sector has partly arisen because banks on both sides of the Atlantic have been "evergreening" loans – or in essence extending the maturities – and practising forbearance to avoid recognising losses.
Banks and borrowers have been able to conduct such evergreening because interest rates have been at rock bottom. But if rates rise, this evergreening will be harder to maintain. What makes this doubly pernicious is that any rise in rates might hit just as the sector is heading for a wave of refinancing.
To understand this, look at some numbers compiled by the Institute of International Finance, the Washington-based banking lobby group. The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since).
Thus far, the banks have "dealt with potential delinquency problems in part by extending loans until 2011-13", the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, "nearly half of these are at present ‘underwater’, ie have mortgages in excess of the current value of the property", it adds.
Marginal companies in the retail mall sector are facing the threat of bankruptcy as they lose market share to online sellers, reports Bloomberg.
Online sales have to lead you to question the whole retail selling strategy. We have 21 square feet of selling space for every man woman and child in this country. We already have double of what we need. With the explosion of online sales, what happens to all these retail malls and shopping centers which are marginals? Huge changes are going to be taking place as people continue shopping online.... In the end what do you do with the retail space...This is going to be a huge question for retail in the next ten years, that's why Walmart is starting to build smaller stores, that's why Walmart is building more overseas than they are building here. It's going to be the biggest retail change that we've ever seen."
(h/t ZeroHedge)