Commercial Real Estate Loans Spell Trouble for Small Banks?

Real Estate Agent with Kiemle & Hagood

The New York Times included a recent article on the credit crunch now effecting the commercial side of the marketplace last Thursday.  Although those of us in the industry knew this was already happening, its starting to gain national press ...

Most of these banks were never big players in credit cards, subprime mortgages or credit-default swaps. But they were major lenders to commercial real estate developers, home builders and small corporations. As the recession tightens, losses have started to surge.

“There will not be the shock and awe factor” of the big bank losses, said Nancy A. Bush, a longtime banking analyst. But “small and midsize banks are up to their eyeballs in commercial real estate related to residential development and business loans. We are going to see a reckoning with how bad that got” in 2009.

Even here in sleepy North Idaho, we've been hearing rumors surrounding a number of our local and regional financial institutions.  Lots of under performing loans on subdivision development seems to be the big area for concern.  Market value on several banks have dropped by double digits in the past quarter and nearly all of our local banks are reporting deposit declines. 

Why are deposit declines a concern?  Banks are only permitted to lend against their core deposits and only up to a certain ratio against those funds.  One banker that I recently had breakfast with indicated that his bank is simply done making loans for the time being ... if the client is not bringing substantial deposits with him, then we simply can;t make the loan regardless of credit, income or property value. 

Pretty scary times, but there definitely are rays of hope out there.  SBA loans are available and while we hear bad news daily about many financial institutions there are just as many that ARE still making loans and have funds available for the right project.  We recently closed escrow on a sizable medical building here in town and although the loan funding took a little longer than anticipated, in the end it came through virtually without a hitch. 

Another strong player in the market ... credit unions!  Although credit unions have restrictions on business banking and commercial lending, more are showing an interest in this side of the industry.  It could be interesting to see these lenders come to the commercial market in a big way in the coming years.

Chris Schreiber, CCIM / Associate Broker


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