The three-story Magpie condominium building located in Glenwood Meadows neighborhood in Sacramento, California was foreclosed by a bank in 2008 and last month, it was sold to investors for about $3 million, way below the original mortgage amount of $7.4 million.
Bank repo properties in commercial and multifamily real estate market such as the Magpie development are expected to surge in the next two years.
Industry experts said that the commercial real estate market in Sacramento, as well as nationally, is facing a scenario similar to that which the residential real estate market had faced years ago. They added that the decline in market values has affected even borrowers who have good credit standing.
Concern over the rising bank REO properties in the commercial real estate market is widespread, though there is varying opinions about the level and depth of its effect.
A report by the Real Estate Econometrics showed that the current default rate of the national commercial mortgage is at its peak in 15 years, surging by almost 2.25 percent in the first three months of this year, a 1.62 percent increase from the last quarter of 2008.
Meanwhile, the multifamily mortgage default rate in the first quarter inched up 2.45 percent from 1.77 percent the previous quarter.
The New York-based analyst, which used the Federal Deposit Insurance Corp. for its report, predicted that commercial default rate may increase by as much as 5.3 percent by the end of 2011, and it will slide down gradually thereafter.
The report also noted that even borrowers who have good credit standing are having difficulty finding new financing for their mortgages, which contributed to the increasing number of bank REO properties.
Furthermore, the report stated that the drastic decline in labor markets and the real economic activity since September 2008 has undermined property fundamentals.
However, Sandler O’Neill and Partners research analyst Tim O’Brien believed that there will be a rise in commercial mortgage defaults but some banks will be able to avoid it.
He explained that community banks could not compete with those that issue conduit loans where single mortgages are combined and transferred to trusts. He concluded that many of these banks may have less risk of exposure to defaults.
Real Estate Econometrics pointed out that the projected increase in bank REO properties in the commercial real estate market needs immediate policy intervention.
