1Q Bank Results: Potential for CRE Armageddon Fading
Weakness, Trouble Remain but Healthy Lenders Could Carry CRE Markets to Better Days
Although first quarter results of U.S. bank holding companies across the country are unmistakably downbeat about the short-term outlook for commercial real estate in general, and their portfolios in particular, they also hint at a growing sense that the problems are working themselves out.
For starters, banks generally reported that troubled loan assets were systematically moving through their books. For example, older construction loans on commercial developments and owner-occupied properties were being shifted to term loans, giving borrowers a chance to work through slow cash flow periods.
Banks were also widely reporting that the inflow of new nonperforming commercial real estate loans was beginning to slow down. At the same time, more of the loans already being labeled as non-performing were being shifted to the real estate owned (REO) category. From there, it is likely only a matter of time before those assets would be sold back into the marketplace.
In the performing section of their portfolios, banks reported that a substantial portion of those assets have also already been renewed or restructured.
In its April 2010 Global Financial Stability Report, the International Monetary Fund contained a brighter outlook for bank losses in the near term, as expected write-downs on both the loan and securities books of U.S. banks decreased across the board compared to last fall, said Mark Fitzgerald, senior debt analyst for CoStar Group.
"These improved short-term losses are due primarily to two factors. First, signs of an improving economic environment have decreased loss expectations," Fitzgerald said. "Second, some write-downs have simply been pushed forward, as external factors, including low interest rates, have enabled banks to push off distress into the future."
In part because of that delay, the IMF report forecasts real estate loan charge-offs are still expected to increase in 2010 and may not peak until 2011.
"What are the implications for commercial real estate investors?" Fitzgerald asked, then answered: "The banks supply approximately 50% of all debt capital to the sector, so lending capital could be constrained for some time. However, there is a bright side. If we continue to follow our current path, and distressed assets bleed slowly into the market over time, then healthy lenders may have enough capacity to meet low transaction volumes (especially with depressed pricing). The large banks that have recently reported
healthy earnings (primarily due to their trading and fixed-income operations) are a potential source of capital, and these banks have historically been under allocated to commercial real estate compared to the overall banking sector."
However, Fitzgerald added: "On the other hand, if an external factor pushed more distress into the marketplace (i.e. major interest rate increases, changes in regulator behavior), this could create significant opportunities for opportunistic investors."
What follows are recent comments and reports from specific large and medium-sized bank and bankers regarding current commercial real estate portfolio and market conditions and market outlooks. The statements come from first quarter earnings reports, earnings conference calls and monthly banking condition filings with the U.S. Department of Treasury and are believed to be relatively indicative of what most banks reported.
