The trouble with commercial real estate

On a Fed presentation last month, the central bank are worried that banks that have (huge) exposure to the commercial real estate front are slow to take losses amid declining property value and rental payments.  Plus, with insufficient reserves for every dollar of bad loan kept (some below $.40 when it used to be 1.5x as much back in 2007), trouble in CRE could only be expected to worsen.

Last month’s Fed presentation supports criticisms that banks have been slow to take losses on bad commercial real-estate loans. The value of commercial real-estate loans as recorded by banks has declined at a much slower rate than property values since 2005. But banks have been slow to absorb losses on their loans partly due to “capital preservation” concerns, the report states.

Bank examiners are stepping up their scrutiny of commercial real-estate portfolios at U.S. banks. Michael Stevens, senior vice president of regulatory affairs at the Conference of State Bank Supervisors, said regulators are reviewing greater volumes of commercial real-estate loans than they did before the financial crisis erupted.

What’s making this worse is the fact that about half of the commercial real estate loans are held by banks.

A report from Bloomberg could only justify the Fed’s worries:

Vacancies climbed to 16.5 percent from 13.7 percent in the year since Lehman Brothers Holdings Inc. filed for bankruptcy, New York-based Reis said in a report. Effective rents, the amount actually paid by tenants, fell 8.5 percent, the biggest year-over-year drop since 1995.

“The decline in effective rents really accelerated after the fall of Lehman Brothers,” Victor Calanog, director of research at Reis, said in a statement. “Tenants will continue shedding occupied space as jobs are lost.”

With all these problems still intact, one could only scoff at the idea that recovery is on its way.

Source: WSJ , Bloomberg


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