August 7, 2001

Commercial Mortgages:
Commercial Loan Default Rate - Low

In regards to commercial mortgages, we're seeing several mid-year reports indicating that default rates on core commercial mortgages remain exceptionally low. The Wall Street Journal reported, "Credit losses on long-term commercial mortgages ticked up in the second quarter, but are still at very low levels, according to a new study done on commercial mortgages, a sign that rates on commercial mortgages have remained solid for this point in the economic slowdown.

The recent losses associated with commercial mortgages are well below the historic average of about 0.70% since 1972 and nowhere near those during the real-estate debacle of the early 1990's, when credit losses finally peaked at 2.37% in 1993, causing big losses among institutional investors that reverberated throughout the economy. The property type showing the largest losses was retail, at 0.20%, with strip centers and malls hurt by a spate of store closings and retailer bankruptcies. The strongest sector was commercial mortgages on apartment buildings, which recorded losses of just 0.04%."

A member of Steelhead Capital recently attended a San Francisco commercial mortgages and real estate forum comprised of individuals with varying disciplines within the industry. Perspectives on commercial mortgages were shared from folks involved in REITs, lending, syndication, development, opportunity funds and commercial mortgage services. The topic of discussion focused on what lies ahead in the next cycle of commercial mortgages and real estate. The overall sentiment was that the commercial mortgages market will present numerous buying opportunities over the next few years.

Some of these opportunities will stem from sources like REITs disposing of "one-off" assets that were purchased as part of a larger portfolio and don't really fit within their standard investment parameters, developers with insufficient balance sheets to finish construction, or property owners defaulting on their commercial mortgages and loans as a result of vacancy increases. Additionally, it was noted that the so-called Fourth Quarter recovery was not likely, and we will see continuing market corrections over the next eighteen months.

What this really means is that although default rates are extremely low, there may very well be a shift upward as the economy sleeps off the hangover. Everyone agreed that having sufficient "staying power" would ultimately lend itself to significant upside as new opportunities with commercial mortgages present themselves.

FYI...if corporate earnings continue to stumble, we may see investor "flight to quality" away from corporate bonds and towards Treasuries, thus flattening Treasury yields and lowering interest rates as a result.

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With an extensive lender and commercial mortgages network, Steelhead Capital has built its reputation on structuring commercial mortgages and commercial real estate loans requiring both debt and equity placement. Fluctuations in the capital commercial mortgages present significant challenges for investors and we are pleased to provide financing, as well as, guide and advise its clients through the process of obtaining commercial mortgages. Whether you are looking for apartment financing, commercial financing, commercial mortgages, or creative "out of the box" real estate loan alternatives, we can help.

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