Commercial property debt continued to see more delinquencies in October, according to several rating agencies, and one rating agency voiced concern about how these problems will impact small and mid-sized regional banks.
The bad news comes as Wall Street tries to launch a commercial mortgage bond under the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). The deal is a $400 million offering featuring a loan to Developers Diversified Realty Corp. The loan is secured by 28 separate shopping centers.
The aggregate rate of delinquencies among U.S. commercial mortgage-backed securities rose to 4.01% as of the end of October, according to Moody's Investors Service. That is up from September’s 3.65% and from 0.6% a year ago.
In announcing its measure of delinquencies, Moody’s said it expects the rate of problem loans to rise further. The rating agency said that of the five core property types tracked by Moody’s, the hotel sector had the largest increase in October.
Hotel properties had a delinquency rate of 6.2%. The worst performance, though, came from multi-family properties, where the delinquency rate was 6.47%.
By region, the South had the highest rate of delinquencies. But, problem loans rose in all geographic locations.
Fitch Ratings, meanwhile said in a report that it is concerned that problems within commercial real estate will overwhelm smaller and mid-sized regional banks. These banks, Fitch said, are "more susceptible to further ratings stress, although these potential declines have been tempered by the significant amounts of capital that have been raised since … May 2009."
Fitch warned that impairments on commercial real estate could run from 11% to 24% of total commercial real estate loans. The rating agency said that while the economic storm has "eased in intensity," its effect is still being felt by many financial institutions. "The next problems will be related to CRE [commercial real estate] loans," the credit rating agency said in a report entitled U.S. Bank CRE Exposure Review: Midsized Regional Banks Most At Risk.
In a separate report, Fitch said it too had a measure that showed a rise in commercial real estate debt delinquencies. The rating agency tied the problems to job losses and office loan defaults.
While Fitch found that hotel and multi-family properties were those with the most problems, the rating agency warned that office properties could be hobbled by widespread layoffs.
"Continued job losses are expected to increase pressure on the office sector," Fitch said in a report, noting that "with the looming possibility of leases expiring on space under-utilized by companies that have downsized, office performance may not reach a trough for a few years."
