With commercial real estate delinquencies at commercial banks having reached a 17 -year high, one of the big questions we must ask is:
How will the continued decline in real estate values further impact banking?
Many industry insiders, myself included, believe we are currently experiencing a "calm before the storm:' Although we've seen some minor signs that the economy may be improving, it's obvious that the commercial real estate markets have not followed suit. According to several sources, the delinquency rate for commercial mortgagebacked securities pools rose to almost 8% in March. Some are now speculating this number may hit 11 % to 12% by the end of the year. Moreover, the Federal Reserve reports that the delinquency rate for commercial real estate loans at commercial banks at the end of 2009 reached 8.81 %. This is a significant number given the amount of debt that still needs to be refinanced over the next few years and the lack of new sources of capital.
Out of the reported $1.3 trillion in debt that must be worked out, only a small fraction can and will actually be refinanced. Due to the weak banking system, the collapse of the secondary mezzanine lending market and the financial burden felt among insurance and pension funds, there are few outlets that are providing financing to the commercial real estate market.
According to the Mortgage Bankers Association, in 2009 active lenders experienced a significant drop in overall volume. The 10 most active lenders provided $62.1 billion in loans during that year-a decline of 56% from the $140.8 billion originated in 2008.
To compound the problem, we have also experienced a drop in property values across the country. For example, rental rates in New York City fell from the low to mid-$100s per square foot in 2007 to an average of $50 to $60 per square foot in the first few months of 2010, according to various commercial brokerage reports. And in secondary and tertiary markets across the country, the declines are even more significant.
As a result of the continuing decline in commercial property values and the debt placed in investment-grade mortgagebacked securities, to day's banking industry is much weaker than in decades past. Thus far in 2010, more than 40 banks have been shuttered according to the Federal Deposit Insurance Corp., and many industry watchers have predicted that the number of bank closings may exceed 200 by the end of the year.
While all the points mentioned above paint an ominous picture, and may in fact signal consequences to the overall banking system worse than what we experienced after the subprime mess, investment opportunities exist that can playa key role in the recovery of the banking sector and capital markets. The key players who can take advantage of the current market are private equity firms. These companies have been standing on the sidelines for months with plenty of capital on hand, speculating that banks and other lenders would begin to cleanse their balance sheets of both loans and other real estate assets they own. As these assets begin to be actively traded in the secondary market, a positive impact on pricing will naturally occur via competition. These actions will reduce current capital constraints and free up lenders to provide much-needed financing that will help restore the economy.
GlobeSt.com News Hub is your link to relevant real estate and business stories from other local, regional and national publications.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
