U.S. banks conceded commercial-property exposure remains a risk but added the risk might be manageable. Federal Deposit Insurance Corp.-insured commercial banks and savings institutions had about $1.1 trillion in commercial mortgages on their books Sept. 30, according to a CoStar Group report. Multifamily lending might be poised for a rebound, according to the report.
A Moody's report paints a grim picture for the recovery of the commercial real estate market. Markets won't improve until late next year at the earliest, and a recovery might be as far off as 2012 under a worst-case scenario, according to the report. "This much is certain: Because commercial real estate has not changed its stripes, it will continue to be an economic performance dawdler, typically lagging macro trends by between four and six quarters," the report said.
Commercial mortgage delinquency rates rose 2.04 percentage points to 3.89% from the first to second quarter, according to a report from the Mortgage Bankers Association. "The economic fallout of the recession continued to push commercial and multifamily delinquency rates higher during the second quarter," said Jamie Woodwell, MBA's vice president of commercial real estate research.
Banks may soon become "accidental landlords" as problems mount for the commercial real estate sector. A flood of foreclosures could hurt the already damaged reputation of banks. "You can imagine some of the places where you might get the most public reaction. Suppose that you had municipal buildings that had been mortgaged to a bank. Suppose you had a nursing home," said Ralph "Chip" MacDonald, a partner with Jones Day.
The rate of CMBS delinquencies, which has remained extremely low through the credit crisis, approximately doubled to 1.2% in last year's fourth quarter. A Deutsche Bank analyst projects the rate will hit 3% by the end of 2009. Although still low compared with
delinquency rates in residential mortgages, the rising CMBS delinquency rate signals serious problems for banks, which own nearly half of all commercial mortgage debt.