Industry leaders fear increase in commercial real estate loan losses

By Michael Stoler | March 31, 2009 11:54AM

A number of banks in the United States are worried about potential defaults on their outstanding loans in the commercial real estate market.

According to articles on PropertyWire.com and Bloomberg, the country’s 10 biggest banks have a total of $327.6 billion in commercial mortgages, which could prompt a wave of defaults as a result of increased office vacancies and bankruptcy of retailers.

A number of office buildings purchased in New York City during 2006 and 2007 have great exposure to potential defaults due to a combination of increased vacancies and significant reductions in office rents. With office rents dropping by at least 30 to 40 percent, industry leaders are worried that these properties will not be able to meet debt service resulting in possible bankruptcy or foreclosure.

Real estate research firm Reis projects a tripling of the default rate, which would result in losses of about 7 percent of the total unpaid balances.

According to Moody’s Investors Service, Wells Fargo and Bank of America account for about 50 percent of the commercial mortgages owned by the 10 largest banks. Moody’s placed banks including Sovereign Bank, Bank of Hawaii, City National Bank and Comerica on a negative outlook list partly because of their risk concentration in the commercial real estate market sector.

Wells Fargo stated in its annual report that it had a total of $594 million in commercial mortgages in 2008, including those it acquired from Wachovia, which were no longer collecting interest, representing approximately 0.6 percent of total loans, compared to a total of $128 million in 2007. Wells Fargo increased its allowance for commercial mortgage credit losses to $1.01 billion at the end of 2008, or about one percent of the total loans from $288 million, or 0.8 percent in 2007.

To the surprise of many, Citigroup has a significantly lower number of commercial mortgages compared to the other largest commercial banks. The total number of commercial mortgages issued by Citigroup is $6.6 billion, or 0.9 percent, compared to 12 percent for Wells Fargo (largely due to its purchase of Wachovia), 7.5 percent for JP Morgan Chase and 6.9 percent for Bank of America.

With the rise in potential defaults, those remaining lenders offering financing are imposing stricter underwriting standards for any new financing.

Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” and “Building New York” on CUNY TV and on WEGTV in East Hampton. His radio show, “The Michael Stoler Real Estate Report,” airs on 1010 WINS on Saturdays and Sundays. Stoler is a director at Madison Realty Capital as well as an adjunct professor at NYU Real Estate Institute, and a former contributing editor and columnist for the New York Sun.


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