Commercial Mortgage Delinquency Decreasing as Property Values Improve

By Kyle Chezum Updated on 2/7/2011

2/07/11

The recession dealt a strong blow to commercial and industrial property values during the middle of 2009, but while the housing market continues to flounder, commercial real estate has begun to improve on many fronts.  In some areas, commercial property values have increased 30% from low levels reached in 2009.  Residential values remain low in most markets and are still fluctuating lower.

The low cost of commercial financing has spurred investors to consider commercial real estate over other income generating investments, such as bonds.  This demand has helped keep the commercial sector afloat.  But this doesn’t mean the commercial industry hasn’t seen its share of trouble.

The delinquency rate on commercial mortgage backed securities currently rests at a record high of about 9.34%, considerably higher than the 1% seen in 2007.  Vacancy is also at a recent record, at 18%.  Rents are low, and many properties are still underwater, weighed down by mortgages taken on during the height of the bubble.  Financing can be difficult for investors and buyers to obtain.  Only about $45 billion in new commercial financing is expected to be dispensed this year, down from $228 billion in 2007.

With these issues still plaguing the industry, an increase in interest rates may push investors to take their money elsewhere.  High performing markets will likely continue to see investor activity, but other markets, where recovery is still slow to start, won’t see recovery for some time.

Delinquency has been decreasing in recent months.  Overall, the commercial market is on its way up and out of the crisis.  But long term stability won’t occur until overall vacancy decreases and rent amounts improve.