Loan Default Rates Continue to Decline

The bank default rate among commercial real estate loans in the first quarter of 2012 fell to its lowest level in nearly three years, according to an analysis released May 30.

The current default rate of 3.45 percent declined from the previous quarter's rate of 3.57 percent and the year-earlier period's default rate of 4.20 percent, according to the data from Chandan Economics. However, the total decline is largely attributable to the multifamily sector, which saw its default rate fall to 2.36 percent from 2.53 percent in the previous quarter and 3.67 percent in the first quarter of 2011.

"The overall decline in the default rate reflects a relatively larger improvement in legacy apartment loan performance," said Sam Chandan, president and chief economist with Chandan Economics. He added that the improvement in the level of multifamily defaults reflected the sector's improving cash flows and broader availability of debt for acquisitions and refinancing.

The report noted that among banks with at least $10 million in apartment loans at the end of 2011, 60 percent reported a lower apartment default rate in the first quarter than in the previous quarter.

The report also showed that the median decline in the default rate for commercial property loans on the whole was 50 basis points, while the median decline for apartment loans was 80 basis points.

While banks' net lending to commercial real estate borrowers was essentially unchanged in the first quarter, down to 0.05 percent from the previous quarter, Chandan found that apartment lending had increased. Chandan said the numbers indicate lenders are showing less caution than they have in the wake of the financial crisis, at least in the apartment sector.

"Based on a separate analysis of the first quarter's loan-level data, lending in the most contested apartment markets show signs of increased risk-taking by all lender groups, including banks, principally as it relates to interest rate risks," Chandan said.

Although Chandan said he's anticipating continued improvements in loan performance and new bank lending in the coming quarters, he did warn warns that significant economic shocks or sharp rises in risk-free interest rates could change that outlook.

"This is an encouraging trend given financial challenges for non-core commercial properties and properties in smaller markets and the uncertain near- and medium-term outlook for new CMBS issuance," Chandan said.