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Waiting for Defaults

Commercial real estate may be in better shape than thought. Real estate professionals who had been expecting a worst-case scenario – an onrush of distressed commercial properties coming onto the market – are still waiting for that to come to fruition.  Ben Johnson, writing in the National Real Estate Investor, notes that “Keep on waiting/lurking seems to be the prevailing view.  According to New York-based researcher Real Capital Analytics, the default rate for commercial real estate mortgages held by the nation’s FDIC-insured depository institutions did increase by nine basis points to 4.28 percent in the 2nd quarter, up from 4.19 percent in the 1st quarter. For those of you keeping score on a historical scorecard, at its cyclical low in the 1st half of 2008, the commercial mortgage default rate was 0.58 percent.  A mere pittance.  Year-over-year, the tale is more striking, with the commercial default rate up by 139 basis points.”

Instead of accelerating, Johnson says that the negative drift seems to be slowing.  “Year-over-year increases had been accelerating for 13 consecutive quarters through the end of 2009, but have moderated more recently,” he said.  The dollar volume of commercial mortgages in default recorded the smallest increase since the 2nd quarter of 2007.  Approximately $46.2 billion of bank-held commercial mortgages currently are in default, an increase of $547 million from the 1st quarter of 2010.

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