In the $5.9 trillion commercial loan market, Yavapai County is healthy and has a very small commercial loan delinquency rate.
The global outbreak of COVID-19 further exacerbated the rising trend of remote work. Shutdowns pushed employees into quarantine in their homes, and many never returned to the workplace. However, companies have been investing in software and hardware that enables employees to telecommute for quite some time. The important question facing investors is: Are commercial investments making money and will investors be able to repay their loans?
At the end of April this year, the House Oversight and Accountability Subcommittee on Health Care and Financial Services held a hearing titled, “Health of the Commercial Real Estate Markets and Removing Regulatory Hurdles to Ensure Continued Strength.”
The hearing focused broadly on the commercial real estate market and touched on a variety of market and policy challenges. Member questions concentrated on themes of inflation, interest rates, regulations, affordable housing and specific policy decisions advanced by the Biden administration.
The CRE Finance Council (CREFC) submitted a statement that was entered into the record by Chairwoman Lisa McClain, (R-Michigan).
Interesting points from the article:
Lending Composition: As shown in the table tot he right, the $5.9 trillion CRE sector is supported by a variety of capital sources. Banks hold 50% of all CRE loans and are followed by Fannie Mae, Freddie Mac and Ginnie Mae at 18%, life insurance companies at 12%, commercial mortgage-backed securities (CMBS) at 10%, state and local governments at 8%, and REITs and finance companies at 2%.
From a loan perspective, CRE loan distress remains subdued. Loan performance remains remarkably resilient, holding well below pandemic and Great Financial Crisis highs. The CMBS significant transparency allows for important insights into CRE asset-level performance. As of March 2024, 4.67% of CMBS loans were delinquent (see chart below), well below the June 2020 pandemic peak. The overall delinquency rate has been in the mid-4% area since July 2023. From the snapshot below, office loans currently have the highest percentage of distress, with industrial loans performing extremely well with a delinquency rate of just 0.47%.
Bank and Life Insurance company Fourth Quarter 2023 delinquency rates are even lower than CMBS levels at just 1.31% and 0.36%, respectively. And despite the 2023 regional bank turmoil and negative outlooks on the office sector, banks have strong reserves ahead of potential losses. However, the longer benchmark interest rates remain high in comparison to recent levels, the greater is the risk of increased loan defaults and potential stress on the banking and financial sector.
Overall CRE lending volume fell sharply in 2023, just $429 billion, down 47% from the $816 billion in 2022 and a 51% decrease from 2021. Thus far, 2024 is showing some improvement. For example, total private-label CMBS issuance, as of April 19, is up 175% year-over-year, from $7.8 billion to $21.3 billion.
The only commercial loans in the Quad Cities area that publicly report delinquency rates are CMBS loans. Commercial real estate information, analytics and news provider CoStar, as of May 15, 2024, reports only one commercial loan in Prescott Valley that is more than 90 days delinquent. No other CMBS loans in Yavapai County are reporting any delinquency.
In the $5.9 trillion commercial loan market, Yavapai County is healthy and has a very small commercial loan delinquency rate. Additionally, the national CMBS commercial loan market delinquency rate has dropped from 10.32% in June 2020 to 4.67% in March 2024, showing a healthy trend. QCBN
By Matthew Fish
Matthew Fish, MBA, is the designated broker at Prescott Commercial Real Estate, 122 N. Cortez St., Ste. 300 in Prescott.
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