NEW YORK, Sept 8 (Reuters) - Commercial mortgage defaults of loans made by banks are projected to peak in 2011, and could set a new record next year, according to a report released on Tuesday by Real Estate Econometrics.
The real estate research firm revised its early projections for the rest of the year, viewing the default rate of mortgage loans on office buildings, hotels, shopping centers hotels and other non-residential income earnings property to be 4.2 percent, up the most recent forecast of 4.1 percent.
Falling rental rates, higher vacancies and the absence of a functioning credit market have combined to undermine borrowers' abilities to keep current with their monthly payments.
Real Estate Econometrics also raised its default projections for next year and 2011 to reflect a larger number of loans moving from delinquency to nonaccrual -- loans lending institutions do not expect to be repaid in full.
In the second quarter, delinquent commercial mortgage balances across all banks fell by about $2 billion, while those in nonaccrual balances jumped $6.5 billion.
The shift corresponds with banks working to identify and mitigate losses associated with problem loans earlier in the delinquency period and a rise in the share of delinquent loans that will require modification or foreclosure, Real Estate Econometrics said.
At 2.88 percent, commercial mortgage defaults in the second quarter were at their highest level since 1993/1994, the report said.
The most aggressively underwritten commercial mortgages begin to mature in 2011 -- just as property fundamentals and prices are stabilizing, Real Estate Econometrics said.
Higher expected defaults are expected to be especially troubling for smaller banks because their exposure to commercial real estate is significantly higher.
For institutions with more than $10 billion in assets, commercial real estate concentrations are 9.5 percent of net loans, while those with less than $10 billion in assets, concentrations surpass 20 percent, the study said.
At 28.4 percent, exposure to commercial real estate is highest for institutions with $100 million to $1 billion in assets, Real Estate Econometrics said. (Reporting by Ilaina Jonas; Editing by Anshuman Daga)
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