The Specter of Commercial Real Estate

Recent news articles have suggested that the home mortgage foreclosure crisis could be followed with a wave of commercial real estate defaults.

If that happens, many institutions may suffer.  The liquidity challenges that have come about from loan losses could curb new lending.  More banks might go under.  New interventions might be needed.

What institutions are likely to be among the ones hurt most by a potential CRE default surge?

Looking at data from the Federal Reserve, size matters.  This is because the concentrations of commercial real estate are more often than not a big part of the portfolio at smaller banks.  The next table describes the concentrations of commercial real estate at US financial institutions, sorted by their size.  Banks in peer group 5 are the smallest, whereas banks in peer group 1 all have more than $10 billion in assets.   At the same time, larger banks are more likely to have higher percentages of past due commercial real estate loans on their books.  And, the cushion is greater at the smaller banks.  As a group, they have higher amounts of capital relative to their loan portfolios.

peer group	CRE/loans leases	CRE 30-89 past due	tier 1 capital
5 (less than $500MM)	46.75	1.89	9.54
4 ($500MM-$1B)	50.22	1.08	9.09
3 ($1B-$3B)	51.43	1.04	8.71
2 ($3B-$10B)	44.82	1.18	8.48
1 $10B+	33.06	1.29	7.37

~ by samsondoggie on January 8, 2009.