Crisis in commercial real estate (CRE)

A warning from one of the Atlantic business bloggers:

The Fed is keeping a very close eye on commercial real estate (CRE). And it’s worried. CRE is a big market to watch. Greenlee notes that at the end of the second quarter, commercial real estate debt was approximately $3.5 trillion.

And here comes the bad news:

Also at the end of the second quarter, about 9 percent of CRE loans in bank portfolios were considered delinquent, almost double the level of a year earlier. Loan performance problems were the most striking for construction and development loans, especially for those that financed residential development. More than 16 percent of all construction and development loans were considered delinquent at the end of the second quarter.

It should be a really, really worrying statistic that 9% of all CRE loans are delinquent — because it isn’t that hard for most of these loans to make monthly payments. Commercial mortgages are generally structured differently from fixed-rate residential mortgages. Many require relatively low monthly payments for the term of the loan, with a larger balloon payment due upon the loans’ maturity. So if a large portion of commercial borrowers can’t even make those relatively easier monthly payments, then we’ll see some far more serious problems once those balloons come due.

And that storm is coming. Greenlee also says:

Of particular concern, almost $500 billion of CRE loans will mature during each of the next few years.

$500 billion isn’t a small number by anyone’s standards. Don’t expect these loans to be rolled over very easily either. Banks are still keeping clenching their wallets tightly, and the commercial mortgage-backed securities market remains largely closed. Speaking of CMBS, banks have a lot of it, and those delinquencies are increasing as well, says Greenlee.

I’m surprised that the havoc wreaked by the current crisis in everyday life hasn’t been far greater. But I’m not at all convinced it’s because the crisis was less severe that I first thought. We will only know in hindsight, and maybe not even then, how much systemic trouble has been papered over by government spending, cost cutting, clever accounting, and delaying the inevitable.

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