Looming Collapse Of Commercial Real Estate Threatens Banking Industry

US commercial real estate values have continued to plummet since 2007, and experts believe the sector will not recover before 2012. Industry analysts project that the banking sector …

US commercial real estate values have continued to plummet since 2007, and experts believe the sector will not recover before 2012. Industry analysts project that the banking sector could incur as much as $250 billion in commercial real estate losses between now and 2011, creating substantial uncertainty over the future of the banking industry. For more on this, see the following article from Money Morning.

The labor market has stolen the spotlight in recent months, but there is still a large amount of uncertainty in the banking sector, which continues to suffer from tight credit, a spate of foreclosures and potential losses in commercial real estate (CRE).

Commercial property values in the U.S. have plummeted 36% since peaking in 2007, and the commercial real estate market is unlikely to recover before 2012, according to the quarterly PricewaterhouseCoopers Korpacz Real Estate Investor Survey, released in September.

Federal Reserve Associate Director of Banking Supervision and Regulation Jon Greenlee said in testimony before Congress this week that those large regional and community banking firms building up “unprecedented concentrations of CRE loans” will be particularly affected by emerging conditions in real estate markets.

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Roughly $530 billion in mortgage-backed securities are due for refinancing between now and 2011, according to property researcher Foresight Analytics LLC, which estimates that the U.S. banking sector could incur as much as $250 billion in commercial real estate losses – enough to cause a as many as 700 banks to fail, in that time.

The Federal Deposit Insurance Corporation’s (FDIC) “problem list,” or banks that run a higher risk of failure, grew to 416 in the second quarter, up from 305 in the first quarter. That’s the highest number since the second quarter of 1994, when there were 434 banks on the list.

Greenlee says that prices for commercial properties would probably fall further and that many institutions would benefit from portfolio level stress testing, improved management information systems, and more robust appraisal practices, Reuters reported.

Another dark cloud appeared on the CRE market last week when the Fed threw out five commercial market bonds that were pledged as collateral for taxpayer loans to purchase debt.

In an effort to clean up bank balance sheets and encourage new lending, the Fed opened its Term Asset-Backed Securities Loan Facility (TALF) to so-called legacy commercial-mortgage bonds. TALF attracts buyers by pumping up returns with low-cost Fed loans. Bonds deemed too risky are rejected.

The rejections came as a surprise, and may limit future demand under the program.

“The Fed/collateral monitor is more concerned with credit risk than many expected,” Barclays analysts led by Aaron Bryson in New York, wrote in a note obtained by Bloomberg News.

This article has been republished from a longer article at Money Morning. You can view the full article at
Money Morning, an investment news and analysis site.

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