SBA Launches Temporary Refi Program for Commercial Mortgages

Industry analysts have been sounding the alarm for months now about high volumes of commercial mortgages coming due over the next couple of years that borrowers may find difficult to refinance due to plummeting property values and high loan-to-debt ratios.

But small businesses who find themselves in this situation are getting a helping hand from the U.S. Small Business Administration (SBA). The federal agency is rolling out a temporary program that will allow small businesses to refinance their mortgage debt with a 504 loan from SBA.

The new refinancing loan is structured like SBA’s traditional 504, with borrowers committing at least 10 percent equity and working with third-party lending institutions and SBA-approved Certified Development Companies (CDCs) in the standard 50 percent/40 percent split. A key feature of the new program is that it does not require an expansion of the business in order to qualify.

Small businesses facing maturity of commercial mortgages or impending balloon payments before December 31, 2012 may be eligible for the program. SBA will begin accepting refinancing applications on February 28, 2011. The program, authorized under the Small Business Jobs Act, will be in effect through September 27, 2012.

The new refinance program is only for businesses that can demonstrate that their loans are current and that they have successfully made all required payments over the last 12 months. A new, independent appraisal is required for all projects seeking assistance through the program.

“The economic downturn of recent years and the declining value of real estate have had a significant, negative impact on many small businesses with mortgages maturing within the next few years,” said Karen Mills, SBA administrator.

Mills added, “As a result, even small businesses that are performing well and making their payments on time could face foreclosure because of the difficulties they face in refinancing and restructuring their mortgage debt. This temporary program is another tool SBA can provide to help these small businesses remain viable and protect jobs.”

The SBA initially will open the program to businesses with immediate need due to impending balloon payments before December 31, 2012. The agency says it will revisit the program later and may open it to businesses with balloon payments due after that date or those that can demonstrate a “strong need” for assistance.

“We are making this initial restriction to make sure our funding goes first to small businesses with the most need,” explained Steve Smits, SBA associate administrator of capital access.

Borrowers will be able to refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs. Existing 504 projects and government-guaranteed loans are not eligible to be refinanced.

Congress authorized SBA to approve up to $15 billion in loans under this program, $7.5 billion in 2011 and another $7.5 billion in 2012. Together with the first mortgage, the agency says this temporary program will provide up to $33.8 billion of total project financing.

The program is expected to benefit as many as 20,000 businesses. SBA has hired over 35 new loan processors to handle the increased workload at their Sacramento Loan Servicing Center.

The National Association of Development Companies (NADCO) – the trade association representing the nation’s CDCs – has been monitoring the release of new SBA regulations very closely.

NADCO president, Chris Crawford, commented, “We have been receiving at least 10 inquires a week since the refinance provision was announced as part of the Small Business Jobs Act in September 2010. Small businesses and banks have been clamoring to take advantage of this new, more affordable refinance option as a means to hold on to critical business properties. In many cases, this will mean saving a thriving business from closure if it could not refinance maturing debt. “

CoreLogic Launches Commercial Real Estate Evaluation Service

Information, analytics, and business services provider CoreLogic introduced a new commercial property evaluation service on Wednesday that utilizes more than 7,500 real estate brokers and contract appraisers to provide commercial valuations for lenders, investors, and special servicers.

According to the California-based company, the system allows users to quickly determine the current market rent for properties more cost effectively than formal commercial real estate appraisals.

Evaluations are performed using the income approach and sales comparison approaches to value, providing an overview of local rental market conditions. The commercial evaluation panel was chosen based on the valuators’ local market knowledge and their experience evaluating and marketing specific property types.

The new service can deliver a valuation in 10 business days on average, and users can order and track valuations online 24/7. All reports are reviewed by an internal quality control panel made up of commercial real estate valuation experts.

“Banks, insurance companies, and whole loan and asset-backed investors currently have more than $3 trillion worth of exposure to commercial real estate,” said David Williams, VP of CoreLogic’s broker price opinion (BPO) operations.

Williams went on to explain, “This past December, approximately 9.2 percent of the properties backing commercial mortgage bonds were more than 30 days delinquent. Similarly, many more properties are now underwater and cannot be refinanced. Having an updated, realistic assessment of the value of these properties and their net income stream is essential to reducing risk and determining market-based investment and work-out strategies.”

Commercial Real Estate is Stabilizing and Will Improve, Says NAR

The commercial real estate market will see slight improvements in 2011, according to National Association of Realtors (NAR) chief economist Lawrence Yun.

According to the economist, commercial real estate seems to be stabilizing. He says rising commercial leasing demand means overall vacancy rates have or are about to peak.

The retail sector should hold steady while office and industrial markets will have modestly declining vacancy rates in the New Year.

A NAR survey of more than 400 local market experts show vacancy rates are slowly improving though rents are still soft. An index measuring the impact of 10 variables rose to 42.6 in the third quarter, but needs to be at a level of 100 to be considered balanced.

The last time the commercial market was at 100 was in the third quarter in 2007.

Yun also predicts the improving economy will increase demand for home ownership and renting.

“Multifamily housing is the one commercial sector that has held on relatively well in the past year, and can expect the best performance in 2011,” he said.

“Apartment rents could rise by 1 to 2 percent in 2011, after having fallen in 2009 and no growth in 2010,” Yun added.

According to the NAR commercial real estate outlook, vacancy rates in the office sector are forecast to decline from 16.7 percent in the fourth quarter of 2010 to 16.4 percent in the fourth quarter of 2011, but with very little change during in the first half of the year. Office rent is expected to decline.

Industrial vacancy rates are projected to decline to 13.2 percent in the fourth quarter of 2011, and rent is projected to decline 3.4 percent in 2011.

Retail vacancy rates are projected to remain stable, expected to decline just 0.1 percent in 2011, and rent is projected to decline 0.3 percent in 2011.

The multifamily housing market is expected to decline to 5.8 percent in the fourth quarter of 2011, and apartment rent is projected to experience the only rise in 2011, estimated at 1.4 percent.

A posting on NAR’s real estate blog says that though the market remains uncertain, the number of deals is increasing, which is a good sign for the commercial market.

NAR is headquartered in Chicago, Illinois.

Reports Show Improvements in Commercial Property Sector

By: Joy Leopold Printer Friendly View

Reports by New York-based firms Moody’s and Real Capital Analytics show positive trends in the commercial property sector that experts are attributing to improved credit conditions.

Commercial real estate prices and transactions are both improving, the reports show.

Moody’s reported a 4.3 percent increase in commercial real estate prices during September, marking the first increase in the All Property Type Index since May. Prices rose 0.3 percent from this time last year, although they are down 36.8 percent from two years ago.

The quarterly report measured changes in prices for apartments, industrial properties, office properties, and retail properties.

Though the report posted favorable results, two sectors, office and industrial, saw declines in prices.

The office index saw a 3.8 percent drop in prices and industrial saw a 4.3 percent drop.

“Each of the summer months this year recorded declines in the 3-4 percent range, followed by this month’s sizeable uptick,” said Moody’s Managing Director Nick Levidy, in a statement.

He continued, “The relatively large swings seen in the index recently are due in part to the uncertain macroeconomic environment and the effects of a thin market with low transaction volumes.”

Dollar volume of the 153 repeat-sale transactions for September came in at $3.7 billion, a sizeable increase from August’s $1.85 billion.

A similarly positive report by Real Capital shows transaction volumes continuing to improve, and predicts a strong fourth quarter. Transaction volume grew 5.9 percent from September to October.

Falling prices for office and industrial properties may have helped bring in respective 127 percent and 38 percent year over year transaction increases.

The report revealed asset sales for October were up 121 percent year-over-year, with $12.6 billion in sales for the month. This marks the highest monthly volume for more than two years.

Apartment sales are currently at 3.4 billion for mid-November. Last year November and December apartment sales combined totaled 3.5 billion.

Weak Job Market Strong Dynamic in Commercial Mortgage Performance

The nation’s poor employment picture has become one of the biggest impediments to a perceptible recovery in the mortgage markets – both for residential and commercial real estate.

Job loss is now the primary trigger of default among struggling homeowners, and two separate research reports have uncovered a clear correlation between state-specific delinquency rates for commercial mortgages and unemployment levels.

Fitch Ratings says currently, 10 states have delinquency rates in excess of 10 percent when looking at the universe of commercial mortgage-backed securities (CMBS) loans rated by the agency. All but one of those states – Hawaii – ranks among the worst with respect to unemployment levels.

States with the highest CMBS delinquency rates in Fitch’s study:

  • Nevada: 25.85%
  • Hawaii: 18.03%
  • Michigan: 15.66%
  • Arizona: 14.75%
  • Mississippi: 12.26%
  • Georgia: 12.05%
  • Indiana: 11.65%
  • South Carolina: 10.61%
  • Florida: 10.42%
  • Tennessee: 10.22%

“Though certain macroeconomic indicators have been more encouraging of late, CMBS delinquencies will not subside anytime soon,” said Mary MacNeill, Fitch Ratings managing director. “National employment underpins demand for every property type and a jobless recovery for the U.S. economy foretells continued challenges ahead for commercial real estate.”

Nevada also claims the highest delinquency rate among CMBS loans rated by Moody’s Investors Service, and by a

very large margin. Commercial mortgages in securities that are backed by properties in Nevada carry a delinquency rate of 26.22 percent, according to Moody’s study.

That’s three times the national delinquency rate, Moody’s says, and more than double the state’s 12.48 percent delinquency rate in December 2009. Nevada continues to outpace Michigan – another high-unemployment state and the second highest delinquency rate in Moody’s report (third highest in Fitch’s) – by over 11 percentage points.

Moody’s points out that Nevada loans make up less than 2 percent of loans in U.S. CMBS.

Looking at the overall delinquency rate for CMBS loans, Moody’s reports that it jumped to 8.24 percent in September – an increase of 14 basis points from the previous month. It was the smallest monthly increase in the national delinquency rate tracked by the company since October 2008, and the fourth consecutive month of only modest growth, but Moody’s warns of reading too much into the decelerating pace.

“This easing of the rate of growth in the delinquency rate does not necessarily portend a near term improvement in the market,” said Nick Levidy, Moody“s managing director. “The number and balance of loans becoming newly delinquent remain high, but in the past few months the number of loans that became current, worked out, or disposed has increased.”

In September, Moody’s tracked 311 loans totaling nearly $3.8 billion that became newly delinquent, while 238 previously delinquent loans, totaling approximately $3.3 billion, became current or were liquidated.

Fitch reports a similar rise in delinquencies. The agency says CMBS late-pays rose 18 basis points to 8.66 percent last month despite a declared end to the recession by the National Bureau of Economic Research.

Both New York-based ratings agencies pin the worst performance of CMBS loans on the hotel property sector, ranging between 16 and 21 percent.

The commercial real estate research firm Trepp LLC, however, says to expect a big drop in CMBS delinquency rates for the month of October, namely because a deal has been closed for the purchase of $3.9 billion in debt backed by Extended Stay Hotels, which had been in default.

Trepp says with the Extended Stay bond out of the past-due bucket, delinquencies for October could show a dip of about 35 basis points overall, with an even more dramatic impact in the hotel sectors numbers, which could fall by as much as 500 basis points.

Warehouse Market Sees Gains As Absorption Increases, Vacancies Improve

Despite Leasing Gains, Recovery Isn’t Yet Robust and Industrial Sales Continue to Lag
October 20, 2010

Add another commercial property type that is now on the path to recovery. The U.S. warehouse market joined the office market in clear recovery mode after logging another quarter of positive absorption and improving conditions as the national industrial vacancy rate edged down slightly for a second consecutive quarter.

Similar to its office market counterpart, the industrial real estate market is also seeing the pace of recovery vary quite a bit from market to market, according to CoStar Group’s Third Quarter 2010 Industrial Real Estate Review & Outlook.

Recovery is slower to take root in the sales market and probably won’t be as robust as some would like to see. But with so little new warehouse supply on the horizon, any growth in demand could quickly cause the rate of recovery to accelerate, CoStar Senior Director of Research and Analytics Jay Spivey said in a webinar presentation this week with Hans Nordby, Director of Advisory Services.

“We could be surprised at the level of recovery, given the low levels of supply we’ve seen,” Spivey said.

Seven of the previous eight quarters prior to second-quarter 2010 posted negative absorption. The market has bounced back since earlier this year, absorbing 10 million in the second quarter and 8 million square feet in the third quarter. While far from broad-based, “it’s official – we’re in recovery,” Spivey said.

Leasing activity remains steady. The amount of gross square footage leased quarterly has been a “picture of stability” through the downturn, even spiking to a decade high of 620 million square feet in 2009, one of the worst years for the economy on record. The Inland Empire, (positive 5.6 million square feet), Philadelphia (+5.1 million), Houston (4.6 million) and Phoenix (3.2 million) topped the list for net space absorbed, with Chicago and Cincinnati tied for fifth at 2 million.

While four of the top six markets reporting positive absorption are large distribution hubs, not all the major distribution regions are doing well. Some of the largest, Atlanta, the San Francisco Bay Area and Los Angeles, all posted negative absorption exceeding 5 million square feet in the quarter. New York, Dallas, Chicago and New Jersey also gave back significant space. Seven of the eight markets with the highest negative absorption have been hit hard by the housing and manufacturing busts.

The good news for the market, Spivey said, is that very few warehouse construction starts are on the books for the next couple of years. New supply will hit another all-time low in 2010 — so low that any significant growth in demand as the economy improves could cause a fairly dramatic decline in vacancy rates, quickly accelerating recovery in the warehouse sector.

A look at the percentage of submarkets with declining vacancies in the third quarter shows how fast industrial occupancy is poised to rise as a result of constrained supply. Submarkets vacancies are a leading indicator for the national warehouse market because they generally start to decline much sooner than the national rate.

Almost 55% of the nation’s industrial submarkets saw falling vacancy rates in the third quarter. During the last recession in the early 2000s, it took about 11 quarters to reach that level of submarket recovery, largely due to the huge amount of new space that hit the market early in the decade. With limited supply, declines in submarket vacancy have been much steeper in the current cycle.

Quoted rents have declined steadily for two years in the current downturn, about 11%, a larger drop than the last recession. With quarterly occupancies rising in about half the nation’s industrial markets, rent declines appear to be bottoming.

CoStar forecasts relatively mild absorption in the industrial sector through 2014, much lighter than the huge spikes in both absorption and supply that marked the last recovery. “Overall, we’re going to see improving fundamentals, declining vacancies and rising rental rates,” Spivey said.

Sales Market Recovery Lags

Like other property types, industrial sales transaction volume, measured as a percentage of the total market, remains far below historical averages, and well below the trough of the recession 10 years ago. Most markets are plagued by poor liquidity, though a few, including Raleigh-Durham, Richmond, VA, Washington, D.C., Inland Empire, Tampa/St. Petersburg and Charlotte, are seeing higher square footage sold as a percentage of their total market size. Buyers and sellers remain at odds on selling versus asking prices, though the number of properties withdrawn from the sales market by discouraged sellers is starting to level off.

The CoStar Repeat Sales Index, which measures the price differential between properties that have sold more than once, shows that industrial prices remain in decline, though larger investment-grade properties are seeing some price appreciation in the bifurcated market. Those investors returning to the market prefer the safety of those well-leased higher-end properties.

The largest industrial sales in the third quarter were portfolios, with three of the top four acquired by REITs, including the purchase of seven data center properties in Arizona, California and Virginia by Digital Realty Trust from Rockwood Capital for $725 million. Portfolios made up 40.6% of total sales volume in the third quarter.

While bullish on the recovery long term, industrial CRE brokerage executives sampled by CoStar are cautious about what they see as uncertain signals from the economy.

“The summer may have proved to be an inflection point in the industrial leasing market, but we are cautious about the mixed signals we are seeing in important leading indicators, and what they are telling us about the overall direction of the U.S. economy right now,” said Craig S Meyer, Jones Lang LaSalle managing director and head of industrial real estate for the Americas.

While there’s still significant activity in the big-box sector, manufacturing has lost some of its momentum as inventories have stopped growing as fast, Meyer said. Consumer confidence is being constantly tested and supply chains are expected to run leaner going forward. While imports and cargo volumes through gateway seaport and airport markets have improved, it’s uncertain whether these higher volumes are sustainable, Meyer said.

“We are expecting rents to continue to decline through 2011,” he said. “The worst of the declines may be over, and while there are pockets of organic growth now beginning to develop, demand has not firmed significantly enough throughout the entire industrial market to envision an overall or sustained uptick yet.”

“It will be a long process toward recovery, but the worst appears to be behind us,” said David Bercu, principal in the Chicago office of Colliers International.

“The first step was landlord capitulation on rental and sale prices, which started its rebound second-quarter 2010. Owners have acknowledged that prices have dropped approximately 30% since the peak of 2007 and met the market,” Bercu said.

Recent economic data indicates a slowdown in manufacturing and a reduction in inventories, however, which could have a direct impact on industrial real estate, Bercu said.

Commercial Real Estate Needs to Cope With “Era of Less”

Oct 13, 2010 6:06 PM, By David Bodamer

There’s light at the end of the tunnel for commercial real estate, but the industry’s recovery will play out in an “era of less”, according to the Emerging Trends in Real Estate 2011 released today by PwC and the Urban Land Institute.

Every property sector will be affected by macroeconomic transformations that have taken place. As a result, the conditions that caused property values to surge to vertiginous heights in 2007 are not likely to materialize again. What it means concretely is that the U.S. is seeing a return to multigenerational households. Children are living with the parents for longer due to diminished job prospects and high student debt loads. And baby boomers—with reduced savings—are increasingly living with their children rather than relocating to swank retirement communities. Indeed, recent data from the U.S. Census Bureau showed that between March 2009 and March 2010, the number of households rose by just 357,000—the lowest level since 1947.

In addition, scaling back will mean fewer cars, smaller offices and fewer distribution links. As a result, every commercial real estate sector faces some continued scaling back rather than any increased demand for new space in the near future.

In this climate, investors should anticipate high single digit returns for core properties and mid-teen returns for higher risk investments.

Jonathan Miller, the report’s principal author, and Stephen Blank, a senior resident fellow for real estate finance with ULI, revealed the annual report’s findings at the Urban Land Institute’s Fall Meeting being held in Washington D.C. from Oct. 12 through Oct. 15. Miller and Blank both emphasized that the outlook for commercial real estate had clearly improved from a year ago, but were quick to point out that any enthusiasm should be restrained by the many challenges that remain.

What may be frustrating for the sector is that its future is not entirely within its control. As one respondent said, “Our problems are much bigger than real estate, and solutions are well beyond the scope of our industry.”

Most significantly, respondents identified job creation as a key determining factor of the sector’s health, but “nobody knows where the jobs are going to come from,” Blank said. As a result, Blank projects the U.S. economy is looking at something more like a “reverse J” recovery as opposed to a V- or L-shaped recovery.

In addition, the outlook is uneven. For example, the investment picture remains bifurcated with only top assets in the best markets trading. In fact, according to Miller, some respondents even expressed reservations that investors may be overpaying for these assets. In all, property values are continuing to re-set to levels below the 2007 peaks and the pricing on some deals does not appear to take this into account. Meanwhile, for lower quality assets “it’s hard to tell at all what their values are,” Blank said. “Investors don’t want to look at them at all.”

Debt remains an overriding issue in assessing the investment climate. Equity is available. In fact, many buyers are sitting flush with cash. More than 55 percent of respondents to the survey said that equity was either “moderately” or “substantially” oversupplied. On the flip side, more than 78 percent of respondents said that debt was either “moderately” or “substantially” undersupplied.

“Regulators looking the other way for a long time certainly have helped,” Blank said. “Low interest rates and [other conditions] have helped lenders” and put them in a position to originate loans. “But they only want to look at the best assets.”

The outlook also varies by market. According to the report, the top 10 markets in the country are Washington D.C., New York, San Francisco, Boston, Seattle, Houston, Los Angeles, San Diego, Denver and Dallas. What the best markets have in common is that they are generally 24-hour cities that boast high concentrations of brain power, echo boomers, empty nesters and are investor magnets. On the flip side, housing bust markets—such as the Southwest and Florida—and the Midwest have the bleakest outlooks, according to the report.

When it comes to property types, apartments ranked as the most attractive investment option among all property types, according to survey respondents. The sector received a score of 6.19 on a scale of 10 followed by industrial at 5.07, hotels at 4.78, office at 4.72 and retail at 4.50.

In the retail sector, only fortress malls and top-tier neighborhood centers in infill markets are performing well. Class-B and class-C malls continue to struggle as do power centers and neighborhood centers built on the fringes where population growth has faltered.

As for development, survey respondents think it is still a long time before the industry will require large amounts of new construction. It could be three to five years before volume rises significantly and even longer than that for the retail sector, which respondents believe is the most overbuilt. No sector got a positive development rating in the survey. Apartments received a 4.85—on a scale of 10—while industrial scored 3.12, hotels 2.33, retail 2.26 and office 2.06.

As Blank put it, “We don’t need anything new.”

Analysts See Demand for Multifamily Strengthening Through 2011

Landlords Expected to Benefit from “Catch 22″ for Renters; Many are Unable to Qualify for a Mortgage Even as Single-Family Home Prices Tumble

The outlook for the multifamily sector is stabilizing, with vacancies that peaked in late 2009 continuing to decline as demand slowly grows and the new supply pipeline all but shut off. That’s the conclusion of a recent Fitch Rating report, drawing extensively from CoStar Group data and presented during a recent webinar on the varying degrees of recovery in U.S. commercial and residential real estate sectors.

Private-sector job growth has led to positive net absorption for multifamily properties, with supply constrained markets such as Washington, D.C./Northern Virginia, San Jose and Boston ranking among the best in the country, while markets bombarded by the weak economy and single-family housing collapse such as Florida, Las Vegas, Detroit, Norfolk, and Memphis faring the worst, according to Adam Fox, senior director, U.S. CMBS.

Citing statistics from CoStar subsidiary PPR, Fitch Managing Director Steven Marks said vacancy declined to 8.1% in the second quarter from a historic high of 8.4% in fourth-quarter 2009. Vacancies will continue to decline over the next year, fueled by job growth, new household formation and limited supply driving renter demand in the near term. That will result in rising rent revenue and net operating income for apartment owners.

“The effects of a stabilizing economy combined with an advantageous supply-demand dynamic are expected to benefit multifamily fundamentals,” Marks said. “Over a longer time frame, favorable demographics, relatively limited supply growth and tighter lending conditions in the single-family housing market should support fundamentals in the multifamily sector.”

That said, “Ultimately, we believe a recovery will require job growth in order to be sustainable; but rents are rising in the meantime.”

Solid liquidity driven by access to both public market debt and equity and a continuing flow of mortgage debt capital from government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac also bolsters Fitch’s view of the sector, Marks said.

Fitch expects a below-average construction pipeline to churn out little supply for the rest of 2010, and even less in 2011, for two main reasons: most developers can’t achieve economical pro forma returns on projects, and developers are having ongoing difficulty obtaining construction financing from traditional capital sources, namely banks, Marks said.

Given the weak amount of new apartment space, even a modest improvement in job growth will strengthen demand and absorption, though there will be a lag. The current improvement in demand has very little to do with job growth and more to do with new households, with many single people and young marrieds who were doubling or tripling up with friends and family decoupling to enter the ranks of renters.

Single-family housing affordability has improved somewhat over the last few quarters, theoretically reducing demand for rentals on the margins. However, given the amount of equity that home buyers need to get a mortgage — combined with tighter underwriting and limited confidence that prices will stop falling anytime soon — increased affordability may not significantly impair apartment demand going forward, Marks said.

In the 10 most expensive U.S. markets to buy a home, apartment owners generally have had above average pricing power over the past three years, as indicated by stronger rent growth relative to the national average, Marks said, pointing to CoStar data on historical and forecasted changes in rentals rates.

More volatile markets like New York and the San Francisco Bay Area experienced weaker performance in 2009 compared to the broader market due to severe job losses. Going forward, apartment landlords will not be able to increase rents aggressively in several of these large markets, and properties are expected to generate only slightly above-average rent growth compared to the nation over next five years.

In contrast, landlords have had less pricing power in the 10 least affordable housing markets, with demographics and higher home ownership rates working against apartment owners in such Midwest markets as Indianapolis, Detroit, Cleveland, Cincinnati and Pittsburgh.

Commercial Mortgage Delinquencies Vary by Investor: MBA

Delinquency rates were mixed in the second quarter for commercial and multifamily mortgage investor groups, according to a new report issued by the Mortgage Bankers Association (MBA) Thursday.

The delinquency rate for loans held in commercial mortgage-backed securities (CMBS) is the highest it’s been since MBA began tracking the sector in 1997. Delinquency rates for other groups, on the other hand, remain below levels seen in the early 1990s, some by large margins.

According to MBA’s study, between the first quarter and second quarter 2010, the 30-plus day delinquency rate on loans held in CMBS rose 1.39 percentage points to 8.22 percent.

Delinquencies for the GSEs edged up also. MBA reported that the 60-plus day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.01 percentage points to 0.80 percent. The 60-plus day delinquency rate on multifamily loans held or insured by Freddie Mac increased 0.03 percentage points to 0.28 percent.

Insurers and private lenders, though, saw better performance from their commercial mortgages. MBA’s analysis showed that the 60-plus day delinquency rate on loans held in life insurance company portfolios decreased 0.02 percentage points to 0.29 percent. The 90-plus day delinquency rate on loans held by FDIC-insured banks and thrifts remained unchanged at 4.26 percent.

“Different investor groups lend in different ways and on different types of properties,” said Jamie Woodwell, MBA’s VP of commercial real estate research. “Those differences are becoming more evident as the economy continues to struggle to work its way out of the recession.”

Woodwell went on to explain, “Life insurance companies, Fannie Mae, and Freddie Mac continue to see relatively low delinquency rates on their commercial and multifamily mortgages, the delinquency rate on banks’ commercial and multifamily mortgages appears to have reached a plateau, and the delinquency rate for loans in CMBS continued to climb during the period.”

According to Woodwell, performance across all investor groups will continue to depend on economic growth and its ability to generate demand for commercial real estate space.

MBA’s analysis looks at commercial and multifamily delinquency rates for five of the largest investor groups: commercial banks and thrifts, CMBS, life insurance companies, Fannie Mae, and Freddie Mac. Together these groups hold more than 80 percent of commercial/multifamily mortgage debt outstanding.

US Banks Report CRE Loan Troubles Subsiding Amid Strong Quarterly Earnings

Challenges Still Remain: High Amounts of Foreclosed Properties, Unprofitable Institutions and Failures

It appears that commercial real estate adversity at U.S. banks has reached the high-water mark and is abating. According to the Federal Deposit Insurance Corp. (FDIC), second quarter numbers show 90-plus day delinquencies leveling and eventually set to decline because 30-89 day delinquencies are declining. Also, net charge-offs are leveling or declining. The only CRE distress levels still rising at banks is the amount of foreclosed assets, the total of which now stands at $29.77 billion, up from $7.4 billion two years ago.

Also, the banking industry’s quarterly earnings of $21.6 billion are up dramatically from the year-ago loss of $4.4 billion and represent the highest quarterly earnings since third quarter 2007.

Almost two out of three institutions (65.5%) reported higher year-over-year quarterly net income. And while the proportion of institutions reporting quarterly net losses remained high at 20%, it was down from more than 29% a year earlier.

“This is the best quarterly profit for the banking sector in almost three years,” said FDIC chairman Sheila C. Bair. “Nearly two out of every three banks are reporting better year-over-year earnings. As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend.”

Reductions in loan-loss provisions underscored improvement in asset quality indicators during second quarter 2010. Insured institutions added $40.3 billion in provisions to their loan-loss allowances in the second quarter. While still high by historic standards, this is the smallest total since the industry set aside $37.2 billion in first quarter 2008 and is $27.1 billion (40.2%) less than the industry’s provisions in second quarter 2009.

Fewer than half of all institutions (41.3%) reported year-over-year reductions in quarterly loss provisions. Only 40% of community banks (institutions with less than $1 billion in assets) reported year-over-year declines. Reductions were more prevalent among larger institutions. More than half (56.2%) of institutions with assets greater than $1 billion had lower provisions in the second quarter.

The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) declined by $19.6 billion (4.8%) during the second quarter. This is the first quarterly decline in noncurrent loans since first quarter 2006. Noncurrent levels declined in most major loan categories during the quarter. The sole exception was nonfarm nonresidential real estate loans, where noncurrents increased by $547 million (1.2%). However, that was the smallest quarterly increase in three years. The largest reduction in noncurrent loans in the quarter occurred in real estate construction and development loans, where noncurrents fell by $5.9 billion (8.3%). This is the third consecutive quarter that noncurrent C&D loans have declined. Multifamily delinquencies also declined.

Total loan-loss reserves of insured institutions fell for the first time since fourth quarter 2006, declining by $11.8 billion (4.5%), as net charge-offs of $49 billion exceeded loss provisions of $40.3 billion.

The number of institutions on the FDIC’s “Problem List” rose from 775 to 829. However, the total assets of “problem” institutions declined from $431 billion to $403 billion. Also, while the number of “problem” institutions is the highest since March 31, 1993, when there were 928, it is the smallest net increase since the first quarter of 2009.

Forty-five insured institutions with combined assets of $47.3 billion failed during second quarter 2010. For 2010 through the end of the second quarter, 86 insured institutions with combined assets of $69.4 billion failed, resulting in an estimated current cost to the DIF of $16.8 billion.

“Without question, the industry still faces challenges. Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high,” FDIC chairman Bair added. “But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction.”

The U.S. thrift industry also reported a profit in the second quarter ($1.49 billion), the fourth consecutive quarterly profit for the industry.

“The thrift industry has clearly improved from the height of the recession but has certainly not recovered in full,” noted OTS acting director John E. Bowman. “The performance of the industry reflects the state of the overall economy and the stresses from high unemployment, weakness in the housing market and the spread of weakness to the commercial real estate market.”