Dennis Norman
Big Losses Are Forecast For Commercial Real Estate and Expected to Crush Some Community Banks-Can the Housing Market Avoid the Fallout?
Dennis Norman
This morning the Congressional Oversight Panel issued a report, “Commercial Real Estate Losses and the Risk to Financial Stability” which expressed concerns about coming losses in Commercial Real Estate and also described how these losses could affect nearly everyone.
The report states the panel “is deeply concerned that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks, and prolong an already painful recession.”
According to the panel, there are $1.4 trillion in commercial real estate (CRE) loans that were made in the last decade that will require refinancing in 2011 through 2014 and “nearly half (of the loans) are at present underwater,” meaning the borrower owes more o the loan than the property is worth. The concern is that “even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit.”
The commercial real estate crisis is not expected to bring down any of the largest banks however community banks face “the greatest risk of insolvency due to mounting commercial real estate loans losses” according to the report.
Think this won’t affect you if you are not an investor in commerical real estate or a banker? Think again…According to the panel “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.” When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.
An analysis of the St. Louis commercial real estate market by the National Association of REALTORS(R) does not paint a real pretty picture. As you can see from the charts below vacancies have been rising in all four types of commercial property, absorption rates have been negative, and both are forecast to stay that way with the exception of the retail market which is projected to show improvement in vacancies and absorption this year.
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