A new report concludes the level of commercial loan defaults accelerating, but whether that means a surge of commercial foreclosures in San Diego depends on who is assessing the data. Nationally, the Deutsche Bank report noted more than $2 trillion worth of commercial paper is set to mature between now and 2013, and as much as $450 billion would not qualify for refinancing under current criteria.
“This downturn may well exceed 2001-2003 when cumulative default rates reached nearly 25 percent,” Deutsche Bank stated.
The bank said the national commercial delinquency rate reached 4.1 percent as of the end of June. While year-to-year figures weren’t immediately available, that rate was some 3.5 times higher than December.
The bank identified some 2,158 delinquent commercial mortgages representing $27.9 billion in instruments nationally as of the end of June.
The commercial foreclosure activity has been robust enough here that Del Mar Heights-based Trigild, a receiver and distressed property specialist, has expanded its headquarters to accommodate more project management and accounting personnel.
Bill Hoffman, Trigild president and CEO, said in a prepared statement that his company’s portfolio of properties has grown significantly over the last year, and now represents more than $2 billion in defaulted commercial loans. These include the hospitality, commercial office and retail, multifamily and unfinished development sectors.
Hoffman doesn’t expect the distressed commercial property business to slow down.
“Tight credit markets will continue to hinder investors’ ability to pay off loans, and as a result, the rate of commercial defaults is soon expected to top 5 percent,” he said. “With this in mind, we are anticipating a dramatic influx of business in the coming months, and are growing our firm and service to accommodate new clients and employees.”
Jamie Dick, a Newmark Realty Capital Inc. senior vice president, suggests that while commercial foreclosures, particularly when they involve payment defaults, are inevitable in many cases, commercial lenders who are faced with loan maturity defaults — a big balloon payment at the end _ are likely to be more accommodating.
“If the lender forecloses, what are they going to do with it?” Dick said. “There’s a saying going around. It’s called ‘extend and pretend.’ They extend hoping that things will be better when the loan matures again. We are seeing a lot of banks work with borrowers.”
However, Dick said there is a shrinking pool of lenders willing to refinance, meaning some will foreclose rather than attempt a workout. With the commercial mortgage backed securities market effectively dead, finding lenders who will loan at all has become increasingly problematic.
“I’d say that 2007 was the last normal year as far as the CMBS market goes. If you looked at a pie chart you’d see that up until then, CMBS was 65 percent of the market, so you can imagine all of that disappearing,” Dick said.
Dick said that CMBS was a $19 billion market in 1999, but reached $230 billion by 2007.
“And wait until 2017 when all the loans from 2007 will be coming due.”
Some loans are still available. Dick noted that lenders have shown a willingness to provide as much as $5 million, but with very few exceptions, getting access to more capital than that has been extremely difficult. When asked when capital will begin to flow more easily, Dick said it could be years from now.
“I think it’s like an icicle. It will melt, but it will be one drop at a time,” Dick said.
While there are pockets of overbuilding such as the Carlsbad and Interstate 15 office markets and the Otay Mesa industrial market, Dick said San Diego generally doesn’t have the surplus of space, currently the case in markets such as Phoenix and Las Vegas.
“Mainly, we just ran out of places to build. For example, we didn’t have all that land to build shopping centers,” he said. Dick said although some centers are hurting with the loss of some major tenants such as Circuit City, the retail vacancy is 6 percent at most – still a very healthy figure.
“San Diego will recover very quickly,” Dick said.