The default rate for commercial mortgages held by banks in the first quarter hit its highest level since at least 1992 and is expected to surpass that by year-end and peak in 2011, according to a study by Real Capital Analytics.

That could spell prolonged problems for larger banks and even greater trouble for regional and small banks where commercial real estate loans comprise a greater percentage of all loans.

The default rate for bank-held commercial mortgages reached 4.17 percent in the first quarter, up from 3.83 percent in the fourth quarter 2009, according to a report released on Monday by the real estate research firm.

The figures do not include bank-held mortgages on apartment buildings.

Commercial real estate loans are contributing to banks' elevated levels of loan losses, two years after the height of the financial crisis, as commercial property typically lags the economy by about 18 months to two years.

Deteriorating values, high vacancy rates and low rents are expected to push that rate past the 4.55 percent default rate reached in 1992 before year-end and peak at 5.4 percent in 2011.

Sam Chandan, Real Capital's global chief economist, said that even though rents are starting to stabilize, lucrative leases signed during 2006 and 2007 are now expiring.

Those prevailing rates in the market are going to be lower than what's expiring, said Chandan.

Commercial real estate prices in March were off 42.1 percent from their peak reached in October 2007, according to Moody's/REAL All Property Type Aggregate Index.

Some $45.5 billion of bank-held commercial mortgages were in default in the first quarter up $3.7 billion from the fourth quarter 2009, according to Real Capital.

While the volume of commercial mortgages in default continued to rise, the quarter-to-quarter increase of $3.7 billion was the smallest single-quarter increase since the fourth quarter of 2008, Real Capital said.

About 48 percent of all bank-held commercial mortgages were at institutions with $10 billion or more in assets. This group has the highest default rate for commercial mortgages, at 5.04 percent. But at 11.9 percent, the combined multifamily and commercial real estate concentration as a percentage of all loans was relatively low in the first quarter.

On the other hand, about 50.2 percent of all bank-held commercial mortgages were at small- and medium-sized institutions with between $100 million to $10 billion in assets. Although the 3.77 percent commercial mortgage default rate was lower than at the largest banks, the combined multifamily and commercial real estate concentration at these institutions was much higher at 33.4 percent.

(Reporting by Ilaina Jonas; Additional reporting by Joe Rauch in Charlotte, North Carolina; Editing by Tim Dobbyn)

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