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Financials

Commercial mortgage default rates up, pace slows

* Q3 commercial property bank loan default rate up 0.9 pp

* Bank loan default one of smallest rises in 17 quarters

* Q3 CMBS loan delinquencies up 3 percent

NEW YORK, Nov 29 (Reuters) - U.S. commercial real estate loan delinquencies and default rates continued to march toward new records in the third quarter, but the pace of growth slowed, in yet another sign of a nascent industry recovery.

The default rate on commercial real estate mortgages held by U.S. banks in the third quarter rose by 0.9 percentage point, one of the smallest increases since the downturn began, according to a report released on Monday by Real Capital Analytics.

Commercial real estate mortgage payments that were late by 90 days or more rose to 4.36 percent in the third quarter from 4.27 percent in the prior quarter, according to U.S. Federal Deposit Insurance Corp figures.

The rate approached the historic high of 4.55 percent set in 1992 after 17 consecutive quarterly increases. It was the second-smallest increase in three quarters.

“As property prices and rent measures stabilize in many markets, the increase in strain on bank health related to commercial real estate is also becoming more measured,” said Sam Chandan, Real Capital Analytics global chief economist.

By comparison, the default rate in the second and third quarters of 2006, a boom time in the U.S. commercial real estate industry, was 0.58 percent. (For a graphic on the U.S. commercial mortgage bank-loan default rate: r.reuters.com/neg67q )

The report was the latest evidence of stabilization in the U.S. commercial real estate market. Credit rating agency Standard & Poor’s said on Monday the delinquency rate for loans behind commercial mortgage-backed securities (CMBS) rose 3 percent in the third quarter, down a jump of 14.1 percent in the second and 30.2 percent in the first. A loan is considered delinquent if it is more than 30 days late.

At the end of the third quarter, $46.8 billion in CMBS loans were delinquent, or 8.32 percent, S&P said.

The National Association of Realtors said that overall vacancy rates across most types of commercial real estate likely have peaked and may show small improvement by year end.

U.S. commercial real estate prices in October rose 30 percent from a low in May last year, according to the Green Street Advisors Commercial Price Index, whose November results will be released at the end of the week.

While delinquency rates for CMBS remain elevated, the rate of growth has slowed considerably from recessionary levels.

The balance of banks’ commercial real estate mortgages in default stood at $46.8 billion at the end of the quarter.

“Banks still face serious challenges in drawing down their default and real estate owned balances and in working towards a normalization of credit in the markets where the bank-lending model is most appropriate,” Chandan said.

The default rates were greatest at the largest institutions -- those with assets of $10 billion or more. But the concentrations in commercial real estate were the lowest at the big banks, which had the capacity to absorb related losses.

At smaller institutions (those with less than $1 billion in assets) default rates are generally lower. The smaller banks have a greater concentration of commercial real estate holdings and the loans are usually for small markets where the recovery in prices is not that strong, or does not exist.

Banks have been drawing down their exposure to commercial real estate, making new loans at a slower pace than those maturing and selling soured loans. Total commercial real estate mortgage balances fell by $8.8 billion in the third quarter and have fallen by $18.5 billion since the start of the year.

For loans on apartment buildings the default rate in the third quarter jumped to 4.67 percent from 4.13 percent after having falling 0.5 percentage point from the first to the second quarter. Multifamily mortgages in default rose to $10.1 billion on a total outstanding balance of $215.8 billion. (Reporting by Ilaina Jonas, editing by Matthew Lewis)

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