By Al Barbarino
The commercial mortgage-backed delinquency rate increased seven basis points to 9.58 percent in December 2011 – and there’s more to come in 2012, according to the latest analysis from Trepp.
While the numbers danced around in 2011 (eight of 12 months saw rate increases) and the December increase alone was modest, numbers could surge by as much as 75 basis points over the course of the next six to twelve months as a wave of balloon dates on loans originated in 2007 come due, experts said.
A jump of that magnitude would represent more than a full percentage point increase from one year ago, when the delinquency rate stood at 9.2 percent.
Special servicers resolving loans and selling off properties effectively countered inbound delinquent loans in 2011, accounting for much of the ebb and flow. But that’s unlikely to hold, said Manus Clancy, senior managing director of Trepp.
“We think that in 2012 the inbound side will start to exceed the rate at which the special servicers resolve these issues,” he said, adding that the “frothiness of the market” and lax underwriting during 2007 will come to fruition. “It’s time to pay the piper.”
Despite the negative outlook, “The special servicers will continue to try to modify, extend and try to give relief to those guys who are close to making it,” he added.
The percentage of loans tagged “seriously delinquent,” covering loans past 60 days delinquent, in foreclosure, REO and non-performing balloons, increased 18 basis points to 9.06 percent in December.
Office and retail property loans continued to weaken, while lodging, industrial and multifamily loans showed improvements.
Multifamily property rates remained the overall worst, a title maintained throughout 2011, despite a 61 basis point dip down to 15.57 percent. The weak performance seems counterintuitive, given the relative strength of the multifamily market. But the high rate was driven by rent stabilization and controlled buildings which represent a very small segment of the market.
“There were tons and tons of borrowers offering very big loans that came in with the business model that said we’ll kick out the rent stabilized people and replace them with market-paying rents,” Clancy said. “That represents a really big percentage of the delinquency – north of 5 percent.”
The worst year-over-year performer was industrial properties, surging more than 3 percentage points to 12.03 percent; while the best year-over-year performer was lodging properties, which fell more than 2 percentage points.
Retail property delinquency rates increased 33 basis points but remained the best overall performing property type after overtaking office space mid-year.
“You would think that that would have done more poorly,” Clancy said, pointing to a scale back in the operations – and in some cases demises – of stores like Circuit City, Borders, Linens ‘n Things and Blockbuster. “It’s very interesting because the rate is very low despite all of these nicks.”