The Business Insider posted an interesting chart today showing the rapid rate at which commercial real estate loans are going into default. Deutsche Bank, a company that I have represented in the past on several deals, which has been generally very pessimistic about the condition of the real estate markets had to revise its projections even further downward as a result of this latest quarter. Deutsche Bank is now projecting that the delinquency rate for commercial loans will now reach somewhere between 6-7% by the end of 2009, up from their previous estimate of 3.5%.
Interestingly enough, the worsening problems on the commercial side seem to have more to do with the fledgling economy that has reduced rents and caused many business to break leases and less to do with the lack of liquidity that most analysts believed would be the root of the problem. As a result, defaults are occurring sooner than expected because the defaults are now a result of inability of borrowers to make mortgage payments and not the inability of borrowers to refinance upon maturity which was the original concern.
Regardless, lenders are going to have to start addressing the commercial real estate market and are going to have to do it soon. It will be interesting to see if they learn from the residential meltdown or if they will make the same mistakes before they begin further embracing the loan modification concept that salvaged what was left of the residential market. Many banks have already seen the light, now it’s time for the rest to follow suit.