CRE Crisis To Eclipse Early 90’s

The WSJ has an article today on the accelerating pace of defaults and delinquencies on commercial loans, and the likelihood that the crisis could eclipse that which occurred in the early 1990’s. Some notable items in the article include:

According to an analysis of bank financial reports by The Wall Street Journal, the broad shift to real-estate lending can be seen by comparing commercial real-estate loans — including both mortgages and construction loans — with banks’ so-called Tier 1 capital, a key indicator of a bank’s ability to absorb losses. In 1993, less than 2% of the nation’s banks and savings institutions had commercial real-estate exposure exceeding five times their Tier 1 capital. By the end of 2008, that had risen to about 12%, or about 800 financial institutions. A higher ratio means a thinner cushion for loans that go sour.

But for those investors sitting on the sidelines, this juicy tidbit might be just the type of news they are looking for. For a while now we’ve been discussing the risk property owners face as rents and occupancy deteriorate. According to Deutsche Bank,

Of $154.5 billion of securitized commercial mortgages coming due between now and 2012, about two-thirds likely won’t qualify for refinancing, Deutsche Bank predicts. Its estimate assumes declines in commercial-property values of 35% to 45% from the peak in 2007. That would exceed the price drops in the downturn of the early 1990s.

and this regarding non-securitized commercial loans:

Besides securities backed by commercial real-estate loans, about $524.5 billion of whole commercial mortgages held by U.S. banks and thrifts are expected to come due between this year and 2012. Nearly 50% wouldn’t qualify for refinancing in a tight credit environment, as they exceed 90% of the property’s value, estimates Matthew Anderson, partner at Foresight Analytics.

And to understand how loose the lending had gotten, one needs to look no further than First Bank of Beverly Hills, where

…the amount of commercial-property debt outstanding was 14 times the bank’s total risk-based capital. 

Similar Posts:

• Prudential on Life After Debt and The Funding Gap
• Next Wave of Stress Tests To Focus on CRE
• Banks Bracing For CRE Defaults
• $2B London Loan On Deck; Default Likely
• Government Moving Towards Bailout of Commercial Real Estate