YoY Rate of Commercial Delinquencies Up 5x

Commercial mortgage delinquencies are up to 2.45%, a number which is 5x the rate during the same period a year ago, and an 11-year high. The Bloomberg article reporting this number also indicated that from October of 2005 to last November, commercial delinquencies remained under 1%.

The highest segment which is delinquent is multi-family apartment loans, where 5.24% of mortgages are delinquent.

So what we have now are stress tests which have been released indicating that banks need to still raise significant amounts of capital, and we are going into commercial foreclosure season. So what we might see is that the the white light coming towards us at the end of the tunnel is actually a train.

According to the Bloomberg article, Moody’s Investor Services feels that “Properties bought in 2006 are now worth on average 11 percent less than their original price, and those bought in 2007 are worth almost 20 percent less, Moody’s said”.

The reality is that aside from capital still being constrained, there is significant pressure on rents, which are already down from 2007 levels. It is hard to see how prices are down only 20%. The real number I suspect is much close to 30%, or most cases.

I can’t speak for the rest of the country, but in parts of Silicon Valley, landlords are doing virtually any deal that is brought to them. We’re seeing some deals get done at more than 30% below current asking rates, and some at 40-50% below asking rates of 2007, early 2008.

Compounding the effect of lower rental rates is buyers having to assume higher vacancy rates and financing costs, recourse, and a high exit cap rate. Throw all these things together and it is easy to see prices having declined much more than the 20% that seems to show up in print so much these days.

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