Today brought good news and bad news--a combination that will become common--for commercial real estate investors: a huge increase reported for commercial property values was coupled with a report from commercial mortgage data provider Trepp that the CMBS commercial mortgage delinquency rate had increased yet again in December, to 9.34%:
That is the highest percentage of loans 30+ days delinquent, in foreclosure or REO in the history of the CMBS market.
The delinquency rate has been getting steadily worse: from 8.58% in October to 8.93% in November, 9.20% in December, and now 9.34% in January. Of that 9.34% total, 2.89% is loans that are at least 90 days past due; 2.77% is loans already in foreclosure; 1.42% is loans already transferred to REO; and 0.85% is loans that have matured but for which the buyer hasn't made the balloon payment. That's not a pretty situation.
So why the disconnect between good news about real estate operating fundamentals and bad news about default rates? It's because today's commercial mortgage defaults reflect bad decisions from several years ago, rather than the improving outlook. Commercial mortgages generally require only interest payments over the five to ten years until maturity, after which the entire principal has to be repaid. Even if they know they'll never be able to repay the loan (or roll it over), property owners have good reason to hold onto it until the maturity hits. Only when they run out of options do property managers have to come to terms with their losses.
As I've pointed out several times, I expect more of this disconnect between, on the one hand, bad news about defaults, foreclosures, and distressed asset sales--and, on the other hand, good news about the strengthening real estate economy. That all works to the benefit of investors in publicly traded REITs.
Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.
Disclosure: I am long Vanguard REIT Index Fund and ING Global Real Estate Fund.