Crisis at the Mall

The subprime residential mortgage crisis triggered the recession, and now commercial mortgages threaten the recovery.

The default rate for loans on office, retail, hotel, and industrial properties in the fourth quarter more than doubled to 3.8 percent, from 1.6 percent a year earlier, according to a report by Real Capital Analytics, a real estate research firm in New York. The total volume of commercial mortgage defaults on banks’ balance sheets rose by $4.5 billion, to $41.7 billion.

Sam Chandan, Real Capital’s global chief economist, predicted the commercial default rate would reach 5.1 percent at year-end, and the apartment default rate, 5.3 percent. And that is bad news for the lenders, borrowers, and the economy at large.

“Even though job losses have narrowed significantly, commercial real estate fundamentals will continue to deteriorate for some time,” Chandan said in an interview Wednesday. “The rising defaults will lead to more banks taking over properties after they fail, a greater downward pressure on property prices, and further constraints on the availability of credit.”

For apartments, the default rate in the fourth quarter rose to 4.4 percent, from 1.8 percent a year earlier. The total volume rose by $1.6 billion, to $9.4 billion.

Moreover, rising commercial defaults will likely reverberate throughout the rest of the economy, he said. Most of the country’s regional and community banks hold a significant amount of commercial mortgages on their books, and deteriorating credit quality in this sector will likely cause banks to further tighten lending altogether.

“The challenges in commercial real estate has the potential to spill over into the ability of these banks to lend to small businesses and consumers,” Chandan said.