Commercial Real Estate Forecast $300 Billion Losses

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Losses from defaults on commercial real estate loans maturing in the next few years could go as high as $300 billion, threatening to topple nearly 3,000 community banks nationwide, a federal watchdog group has concluded.

Market analysis by the Congressional Oversight Panel (COP), charged with keeping tabs on the government’s Troubled Asset Relief Program (TARP), shows that $1.4 trillion in loans made over the last decade for retail properties, office space, industrial facilities, hotels, and apartments will reach the end of their terms and require refinancing between 2011 and 2014.

According to the panel, the loans most likely to fail are those made at the height of the real estate bubble, when it seemed property values could go nowhere but up. Since that time, commercial property values have fallen more than 40 percent, and now, nearly half of the loans coming due are “underwater,” the panel said, making refinancing particularly difficult to secure.

As the panel notes, “Even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit.”

The COP says community banks, rather than large Wall Street institutions, face the greatest risk of insolvency due to mounting commercial real estate (CRE) loan losses. According to federal guidelines, 2,988 banks nationwide are classified as having a “CRE Concentration.”

None of these banks are among the 19 largest bank holding companies, but are rather the smaller regional lenders who stepped up to extend credit within their local neighborhoods. Forecasts project that banks will suffer their worst losses well after 2010, and well after Treasury’s bailout authority expires under TARP, the panel said.

“The banks that are on the front lines of small-business lending are about to get hit by a tidal wave of commercial-loan failures,” said Elizabeth Warren, a law professor at Harvard University who heads the COP.

Warren and her fellow panel members warn that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.”

Case in point, they said when commercial properties fail, it creates a downward spiral of economic contraction, meaning job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities.

Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, the COP says, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.

The COP’s findings come on the heels of a field hearing the committee held last month in Georgia. Deterioration of the commercial real estate market there has contributed to the failures of 30 Georgia banks since August of 2008 – more than in any other state in the nation.

Posted by

Paul Roesch
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Marketing Director 
Certified Distressed Property Expert, CDPE
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