Commercial Ticking Time Bomb!
High-profile commercial real estate purchases made at the height of the real estate bubble have started to implode left and right, and with the nation’s unemployment rate still hovering at 10% and consumer spending still at sickly levels, borrowers who deal in retail stores and office buildings will feel even more squeezed before long. “Businesses just aren’t taking office space and consumers aren’t buying things at retail stores,” said Mark Riedy, the executive director for the Burnham-Moores Center for Real Estate at the University of San Diego.
That’s a deadly prospect for the thousands of community and regional banks nationwide that hold roughly $860 billion in commercial mortgages and construction and development loans. Georgia’s Synovus Financial, Zions Bancorp of Utah and Buffalo, N.Y.-based M&T Bank are just a few of the banks whose loan portfolios are highly concentrated in commercial real estate, according to credit rating agency Standard & Poor’s.
But trying to gauge the scope of those problems has proven difficult as banks have been slow to recognize losses on many of those loans, because…
Many lenders have not seen the need to foreclose on a borrower who is still current on their payments even if they are upside down on their loan.
At the encouragement of industry regulators, banks have extended the terms of many of their commercial real estate loans, hoping that property values or occupancy levels will improve before long. “There is an element of ‘extend and pretend’ going on,“ said Tanya Azarchs, credit analyst and managing director for Standard & Poor’s. “It is in their [banks'] interest to do that.” Unfortunately, the consensus is that neither prices nor occupancy rates will improve anytime soon. Estimates published last November by the Urban Land Institute and PricewaterhouseCoopers suggest that commercial real estate vacancies will continue to increase in 2010, while prices could tumble further during the year. Prices could fall as low as half their peak levels from 2007.
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