Loans backing bonds
run late
Delinquencies hit record with rising vacancies for
offices
by ,
Bloomberg News
A record share of loans backing U.S. commercial mortgage bonds are delinquent, reflecting rising vacancies for offices, apartments and warehouses amid a lifeless economy, a Wachovia Corp. study said Tuesday.
For offices, late payments surged to 1.14 percent in May from 0.68 percent in February, said Brian Lancaster, head of structured product research at the Charlotte-based company. They rose to 1.75 percent from 1.31 percent for industrial properties, and to 1.26 percent from 0.96 percent for apartments.
Delinquencies on a total of $340 billion worth of outstanding loans backing commercial mortgage bonds may double in coming months as weak job growth reduces the need for more offices and apartments, Wachovia said. Among the gloomiest markets are northern California, Denver, Indianapolis and Atlanta.
Near-record-low interest rates will limit the deterioration as "owners still have significant equity in their properties," Lancaster said. "These loans can withstand the stress."
Also helping overall loan performance are better-performing markets such as Southern California, greater Washington, D.C., and New York City, the report said.
Wachovia ranks 50 cities according to real estate revenue growth prospects for the next year, from "high growth" of more than 7.5 percent to "watch," a drop of at least 5 percent. No markets were "high growth," and 19 percent were on "watch."
Wachovia forecasts that revenue for warehouses will fall 4.2 percent, followed by a decline of 3.7 percent for offices and a drop of 1.3 percent for apartments. Shopping centers' revenue is expected to rise 0.5 percent.
If companies don't speed up hiring or buying, property revenue will remain little changed or decline and the forecasts will prove overly optimistic, the report said. Nevertheless, offices and warehouses will slide until late 2004 or early 2005.
The downtown office vacancy nationwide rate rose to 15.2 percent in the first quarter, the highest since the third quarter of 1996, according to Cushman & Wakefield. Office property is "the most oversupplied," and "shadow space," which isn't being used by tenants or actively marketed, would slow any recovery, should job growth rebound.
Apartment vacancies rose to 6.8 percent, the highest since 1989, on high construction and low interest rates that have lured renters to become homebuyers. Apartment vacancies probably will rise another percentage point in 2004 before bottoming, unless developers "show some discipline or employment takes a sharp turn north," the report said.
The hotel industry, after being stung by a drop in travel after the Sept. 11 attacks, is bottoming and shows strong potential for improvement later this year, the report said. While hotel loan delinquencies have leveled off, they will remain high, especially in such cities and Houston, Charlotte and Atlanta, it said.
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