Commercial Mortgage Defaults Hit 5-Year Low; Lenders Spooked

The California Mortgage Banker’s Association released its quarterly survey last week which analyzes default rates amongst commercial mortgages. The survey analyzed over 10,000 mortgages and found that only 3 were delinquent indicating a default rate of just 0.03%, a level not seen in more than 5 years.

What is interesting however is not that the default rate is so low (which can be attributed to today’s high property prices), but that the fixed income market troubles are spreading to commercial despite the low, low default rates. What we are seeing is the high level of uncertainty across all classes of real estate debt. The markets have been spooked and lenders are pulling back to regroup after a period of time when deals were getting financed under historically relaxed lending standards: high loan-to-value ratios, low debt service coverage ratios (DSCR), all with unusually low spreads. While I believe the pullback to be ordinary and perhaps even needed, it will undoubtedly strengthen the hands of investors with big down payments and straight-forward debt financing.

One final note is the impact this may have on the Mission West Properties acquisition. It was noted by Mission West in mid-July that the deal hinged on amongst other things, the buyer’s ability to secure financing. With all the turmoil in the debt market, it is possible that Carl Berg of Mission West temporarly missed his opportunity to sell.

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