Delinquency rates for commercial property bonds rose to a new high this month as a chunk of loans arranged at the height of the real estate boom came due, a research group said.
In May, the rate surpassed 10 per cent for the first time since Trepp, a group that monitors the commercial real estate market, began keeping records in 1997.
The increase was largely due to five-year loans that were issued in early 2007 when underwriting standards were particularly aggressive. Loans are delinquent when payments are 30 days past due.
Delinquency rates for property loans bundled into bonds and sold to investors have been rising each month, from 9.5 per cent at the end of 2011, Trepp said.
The so-called vintage 2007 loans have been difficult to refinance because in many cases, the debt is close to and sometimes greater than 100 per cent of the value of the property, which declined when the US real estate bubble burst. Some landlords also borrowed heavily based on rosy assumptions about future rental income that have failed to materialise in the wake of the recession. Lastly, banks have grown far more conservative about extending loans.
Only about 37 per cent of 2007 loans have found refinancing compared with an average of 65 per cent for other loans maturing over the past two years, according to RBS Securities.
“What is happening with 2007 vintage five-year loans is potentially a sign of things to come,” said Richard Hill, a strategist at RBS. “Without significant improvement in property values or an increase in the availability of capital, there could be a worse scenario when 10-year loans face similarly difficult times refinancing.”
Those are set to come due in 2016 and 2017 in far larger amounts. Ten-year loans comprise about 90 per cent of the pools packaged for commercial mortgage securities, while five-year loans comprise less than 7 per cent, Mr Hill said.
The spike in delinquencies comes after the market for commercial mortgage bonds has rallied this year. Persistently low interest rates and optimism about a US recovery drove investors into the highest yielding assets.
While the looming maturities for the 2007 loans were well known to investors, the market has come under pressure. Analysts attributed the selling to renewed concerns about Europe’s debt crisis and an increase in supply after the recent liquidation of large collateralised debt obligations (CDOs) of commercial property bonds.
Last month, the Federal Reserve Bank of New York and UBS, the Swiss bank, auctioned CDOs in deals that involved collapsing those vehicles and selling the underlying bonds.