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Hotel Delinquencies Skyrocket as Commercial Real Estate Feels Delayed Punch of Recession

Hotel loan delinquencies rocketed to an all-time high of 15.3% in January in the commercial mortgage-backed securities (CMBS) sector, according to the newly released Trepp Delinquency Report.

The delinquency rate for CMBS hotel loans was just 1.7% in January of 2009. Delinquencies of at least 30 days have been rising by roughly 10% each month over the course of the past year.

What is happening in the hotel sector is indicative of all property types as they report the delayed effects of the nation’s recession. Across the board in commercial real estate, CMBS loan delinquencies soared to 6.5% in January, up from 1.5% in January 2009, according to the report published by New York-based commercial real estate data and analytics firm Trepp LLC.

“Commercial real estate is a trailing asset and a trailing indicator. So the severity of the recession we went through is what’s being reflected in the level of commercial real estate delinquencies we’re seeing now, and quite frankly, we expect them to continue to get worse,” says Tom Fink, senior vice president at Trepp.

In the multifamily sector, delinquencies rose to 9.7% in January, nearly three times the rate of January 2009, when delinquencies registered 3.4%. And the new record high does not even include the default of the massive Stuyvesant Town and Peter Cooper Village in New York.

Tishman Speyer Properties and BlackRock Realty surrendered the 11,000-unit complex to the lenders in late January after defaulting on a $4.4 billion loan for the property, which had been acquired for $5.4 billion in 2006.

The massive default is likely to have a severe impact on the multifamily CMBS delinquency rate. “I think it will take the numbers over 12%. We think the impact on the overall multifamily delinquency rate will be 40 basis points,” says Fink.

In addition to the hotel and multifamily sectors, retail and office properties also recorded significant increases in 30-day delinquency rates. For retail loans, the delinquency rate was 5.7% in January, up from 5.5% in December, and 1.4% in January 2009. Office loans registered a delinquency rate of 3.9%, up from just 0.77% a year earlier. The industrial delinquency rate of 4.5% more than quadrupled the rate of January 2009, when industrial delinquencies stood at 1.09%.

Not enough revenue

Further bad news for the commercial real estate industry is that many delinquencies have yet to be recorded, says Fink. Across the country, a number of properties simply are not generating enough revenue to cover their expenses and debt service.

A number of transaction issues need to be worked through in terms of underlying fundamentals and refinancing needs before the investment picture brightens, Fink says. “The market as a whole has not been able to come up with enough capital to refinance all the maturing loans[including] all the loans that matured in 2009. That lack of access to the capital markets I think will continue to impede significant improvement in the delinquency numbers for a while.”

The hospitality sector has been the most severely impacted of all sectors, according to Trepp. “Hotels are probably the most volatile of the commercial real estate sectors and respond the quickest to changes in economic performance, because travel is a budget item that a lot of companies have more ability to shut down quickly,” says Fink.

“If you have an office with several hundred employees it’s much easier to stop them traveling than it is to give up 10% of your space. You may have a long-term lease, and you still have the people, so you would have to find someplace to put the [employees].”

Value decline affects rates

Delinquency rates have a direct correlation to property values, says Fink. “They are inversely related.” The decline in commercial property values, widely estimated to be approximately 43% from the peak in 2007, has led to an increase in delinquencies because it has hindered the ability of borrowers to pay off balloon mortgage notes, adds Fink.

“Borrowers are past their balloon date and don’t have alternative financing to take out a loan. When property values were increasing through 2006 and into 2007, you could often sell a property for more than the outstanding mortgage.”

So, if a borrower were unable to find new financing in the past, he could resort to selling the building to pay off the loan, notes Fink. “That’s not an opportunity now, because a lot of properties are valued at less than their outstanding mortgage.”

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