Soured Commercial Mortgage Debt Falls to Lowest Since April 2010

The amount of delinquent commercial- property loans backing bonds fell to the lowest in 18 months as landlords take advantage of low borrowing costs, according to Citigroup Inc.

The balance of debt past due tied to skyscrapers, shopping malls and hotels fell $1.5 billion to $53 billion last month, the lowest since April 2010, Citigroup analysts said in a Nov. 2 report. The rate of payments more than 30 days late fell 27 basis points to 9.76 percent, they said.

Property owners are benefiting as Federal Reserve efforts to stimulate economic growth by holding its benchmark lending rate at almost zero for a fourth year pushes lenders to take on more risk for less reward. Sales of commercial-mortgage backed securities are surging as investors gravitate toward the debt in search of higher yields even as sluggish U.S. economic growth threatens to hold down rent and occupancy rates.

“While any deterioration in the economy could certainly spur an uptick in the pace of term defaults, the recent level may be a near-term equilibrium,” said the Citigroup analysts led by Jeffrey Berenbaum in New York.

The delinquency rate soared as high as 10.23 percent in the second quarter as borrowers struggled to pay off maturing loans, according to Citigroup.

Refinancing Boon

Rising commercial-mortgage bond sales are a boon for landlords with maturing debt. Banks have arranged about $32.3 billion of the deals this year, up from $28 billion in 2011, according to data compiled by Bloomberg. Sales may reach $45 billion in 2012, according to Credit Suisse Group AG. Sales peaked at $232 billion in 2007.

Low borrowing costs and demand for distressed commercial real estate means that some borrowers with marginal loans that would have struggled to refinance a year ago will be able to pay off their mortgages, Trepp LLC, a commercial-mortgage data provider, said in a statement today.

The extra yield investors demand to own top-ranked commercial-mortgage bonds rather than Treasuries fell to 1.01 on Oct. 24, the lowest in at least four years, and down from 2.47 percentage points on Jan. 3, according to a Barclays Plc index. The spread rose to 107 basis points, or 1.07 percentage point, on Nov. 2 amid concern that damage from Hurricane Sandy may hurt revenue.

“Market sentiment is for modestly wider sentiment due to the storm-related uncertainty,” the Citigroup analysts said.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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