Commercial Loan Delinquencies to Rise, Barclays Says

Bloomberg
Commercial Loan Delinquencies to Rise, Barclays Says (Update2)
By Sarah Mulholland

Dec. 3 (Bloomberg) -- Commercial mortgage delinquencies rose in November and will climb as the economy slows and unemployment grows, according to Barclays Plc.

Payments more than 60 days late on commercial real estate loans that were bundled together and sold as bonds increased to 0.69 percent last month, compared with 0.57 percent in October and 0.51 percent in September, Barclays data show.

The “relative spike” in delinquent loans marks the “beginning of a sustained, upward trend,” Barclays analysts led by Aaron Bryson in New York said in a report yesterday. “We have repeatedly stressed that CMBS delinquencies are a lagging indicator of performance and tend to lag changes in employment by close to a year.”

Commercial property owners are having a harder time making debt payments as the recession curtails spending and crimps business growth. U.S. companies from Citigroup Inc. to General Motors Corp. eliminated an estimated 250,000 jobs last month, the most since November 2001, ADP Employer Services said today. Concern that defaults may rise caused commercial-mortgage bonds to soar to record yields above benchmark interest rates.

The gap, or spread, on top-rated commercial mortgage bonds relative to benchmarks is about 11.9 percentage points, Bank of America Corp. data show, compared with 0.82 percentage point in January.

Waning demand for the bonds, which are backed by pools of commercial mortgages, caused sales to slump to $12.2 billion this year, compared with a record $237 billion in 2007, according to JPMorgan Chase & Co. estimates.

Delinquent Retailers

Retailers are leading the rise in commercial mortgage delinquencies, according to Barclays. Late payments on retail space rose to 0.58 percent in November, compared with 0.43 percent in October, the data show.

Holiday sales may rise 2.2 percent this year, the slowest growth since 2002 as the number of shoppers drops and retailers lower prices, according to the Washington-based National Retail Federation trade group.

Commercial mortgage delinquency rates will probably be higher during the current recession than in previous economic contractions, according to JPMorgan analysts led by Alan Todd in New York.

“The depth and length of this economic downturn looks to be materially worse than many investors initially expected and worse than that experienced during the last recession,” the analysts wrote in a Nov. 26 report.

Looser Underwriting

Underwriting standards on commercial real estate mortgages taken out between 2005 and 2007 were looser than those on loans in prior years, which will contribute to more delinquencies, the JPMorgan analysts said.

The impending default of two commercial mortgages sent spreads soaring to record highs last month. A $209 million loan to finance the Westin La Paloma Resort & Spa in Tucson, Arizona, and the Westin Hilton Head Island Resort & Spa in South Carolina, is near default after cancellations sapped revenue. In southern California, the owner of the Promenade Shops at Dos Lagos missed two payments on a $125 million loan.

The loans were among the largest in a $1.16 billion commercial mortgage debt offering sold by JPMorgan on April 30, Bloomberg data show. Both loans have missed payments and are being transferred to a so-called special servicer specializing in troubled loans, Bloomberg data show.

Last Updated: December 3, 2008 15:48 EST