Interesting article this morning on the American Banking News web site that claims research firms are reporting that defaults on U.S. commercial property loans are surging, standing at the worst level in 16 years. The reports also indicate things will worsen in 2010 and 2011.
A report from Real Estate Econometrics states that the percentage of commercial real estate loans in default across the nation has risen to 3.4 percent in the third quarter, rising more than half a percentage point from the second quarter. That 3.4 percent default rate is the highest since 1993, when it stood at a 4.1 percent default rate.
There's a lot more to the article but this is bad news for the AEC industry because as the number of defaults increase, you can expect their lending standards to tighten, making it harder for potential clients to access capital and leaving possible projects on the drawing board.
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We warned of this in the 2010 AEC Firm U.S. Market Sector Forecast, citing the potential meltdown of commercial mortgages. "With business conditions as they are, credit continuing to be tight, and commercial property values depressed, it forms the potential scenario for a rise in defaults on commercial mortgages," the report says.
"Bloomberg News reported on August 31, 2009, that 'the default rate on commercial mortgages held by U.S. banks more than doubled in the second quarter from a year earlier amid falling rents and occupancies for malls, office buildings and warehouses.'
"Some fear that a rise in commercial mortgage defaults could set off a crash similar to the one that occurred on the residential side."
This is something to keep an eye on, Ed.
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