Realty Check

Congressional Panel "Deeply Concerned" over Commercial Real Estate

I guess I didn't need the Congressional Oversight Panel for the TARP to tell me that commercial real estate was in trouble, but somehow it's a bit more poignant when they do. 

The Panel's February report opens pretty clearly:

Over the next few years, a wave of commercial real estate loan failures could threaten America‘s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation‘s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

Over the next four years, according to the report, about $1.4 trillion in commercial real estate loans will reach the end of their terms, and nearly half of those are currently underwater, thanks to property values which have fallen more than 40 percent wince their peak in 2007. 

Commercial Real Estate Threat to Banks

In an interview on CNBC's Squawkbox this morning, COP chair  Elizabeth Warren said simply, "Well it's bad." 

Then she explained, "We're looking at a situation where about half of all commercial real estate loans are going to be underwater by the end of this year, and that is going to have a direct impact on about 3,000 community banks, or about 40 percent of our entire banking system."  Not good. 

These, she notes, are mostly community banks, which do a disproportionate amount of commercial and small business lending.  "To the extent that they get socked on the commercial real estate, they see these coming losses, so they tend to husband their money, and that means that the money is not available for their other customers, for the small businesses."

Warren, however, makes it clear that COP is just "sounding the alarm" and that that doesn't mean government should run in with a bailout. 

I asked Dr. Sam Chandan, global chief economist over at Real Capital Analytics, if he thinks the government will step in:

Significant government support for commercial real estate specifically is unlikely in the current environment. From a policy perspective, any intervention will be the result of commercial mortgages weighing on bank performance and undermining the stability of community or regional banks in a systemic manner. The potential for further deterioration in the commercial real estate mortgage pool to introduce systemic risks for a class of lending institutions is a credible risk.

So he agrees with Warren, but doesn't see government bailing out the commercial borrowers the way it's bailing out residential borrowers.  Questions?  Comments?