US Commercial Real Estate Default Rate Low but Set to Rise
Defaults in the US commercial real estate sector remained low in 2007 with realized losses likely to amount to around 1.5%, according to Fitch Ratings. However, default rates are expected to increase through 2009.
Fitch’s annual default study of commercial mortgages underlying its rated CMBS transactions showed defaults totaled only $1.2 billion, or 22 basis points (bps), of $535 billion of loans outstanding in 2007.
Between 2005 and 2007, the cumulative default rate declined to 2.71%, partly due to the large volume of new issuance in those years and the relatively small number of defaults that occurred, Fitch said.
Fitch expects CMBS loan defaults to rise in 2008 as the economy weakens and the liquidity crisis continues. Also contributing to the increasing cumulative vintage 10-year average default rate is the smaller volume of CMBS issuance, combined with the aging of the existing portfolio.
Fitch expects the cumulative 10-year default rate to increase to more than 7.75% by 2009 from the current 7.37%.
Multifamily properties represented the highest of all property type defaults in 2007, with $763 million defaulting or 63% of all newly defaulted loans. The multifamily cumulative default rate ranks third at 4.16%, behind only health care and hotels.
Assuming a similar pattern as in past years with 50% of the defaulted loans realizing a loss at a 40% severity, realized losses would equate to 1.5%.
The 2005 vintage had the largest dollar amount of defaults in 2007 with $237.8 million added; however, the 2000 vintage had the highest default rate (0.52%) when comparing defaulted loan balances to the vintage year’s issuance.
As of year-end 2007, Fitch’s CMBS default study universe tracks 359 transactions and 56,711 loans, totaling almost $535 billion. Full details can be found in U.S. CMBS Loan Default Study 1993-2007.
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