More than a fifth of the commercial real estate loans securitized in 2007, the peak of the property boom, could be wiped out, says a report from Deutsche Bank.
US banks are likely to be the worst affected because they have been active in riskier loans, particularly construction loans and loans for condominiums. 'In our view, banks will once again be at the epicenter of the commercial mortgage crash, just as they were in the early 1990s,' the report says.
Smaller regional and community banks are likely to suffer more than the larger banks, as their exposure to the riskiest construction and land development loans is greater.
Total losses for outstanding commercial mortgage-backed securities (CMBS) loans may be as high as 9 to 12% as borrowers fail to meet monthly payments or get an adequate loan to meet the balloon payment when a current loan matures, according the report.
Commercial real estate borrowers are at risk of defaulting before their loans mature because the US recession has sent vacancies at hotels, office buildings, shopping centres, warehouses and apartments rising and rents falling.
It also points out that private capital could plug the gap. 'We regard the entry of private capital into commercial real estate as a critical step in dealing with the problems that, without question, lie ahead over the next five years or more,' it says.
The Deutsche Bank report estimates that total defaults on loans securitized between 2000 and 2008 to be between $236.1 billion and $291.1 billion, depending upon economic conditions.
Losses to investors are projected at between $66.2 billion $87.5 billion, with the largest appearing in 2012 as five year loans made at the peak of the market come due, according to the report. So in total, US commercial mortgage losses could top $387.5 billion, the report concludes.
