Market Overview

Is Commercial Real Estate A Disaster (MI, SNV)?

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Commercial real estate.

Upon hearing those words you are likely to immediately think of the negative implications: more defaults, more bank losses, next shoe to drop, derailed recovery..well, you get the idea.

But, will commercial real estate really have such a pernicious effect on the economy? Here are some facts about commercial real estate:

1) Commercial mortgages usually are from three to 10 years and at the end of the term the entire principal is due;

2) The Congressional Oversigh Panel estimated that about $1.4 trillion in commercial real estate loans will reach maturity between 2010 and 2014, and nearly half are underwater;

3) Commerical real estate values have fallen more than 40% since 2007;

4) Losses in commercial real estate could be particularly destabilizing for smaller community and regional banks as they have higher percentages of commercial loans in their portfolios.

While these points are clearly worrisome, commercial real estate may not collapse for the following reasons:

1) Commercial real estate losses will not all hit at once in 2011, giving the market some time to improve its fundamentals, such as unemployment;

2) Borrowers, such as strip mall operators, may lose tenants during a recession, but may still have enough tenants to generate rental income and stay current on a loan;

3) Borrowers with commercial real estate loans often occupy at least part of the building they own and can weather the rough economy and wait for occupancies to increase;

4) Regional banks such as Marshall & Ilsley (NYSe: MI) and Synovus Financial (NYSE: SNV) have said they believe loan losses have peaked and credit trends have improved. These banks have already written off a bulk of their non-performing commerical loans and may return to profitability this year.

So, while commercial real estate remains in trouble, it may no be the total disaster that everyone expects it to be. As is often the case with the financial markets, when the consensus expects something to happen, the opposite usually occurs.

Commercial real estate will most likely improve along with the labor market. Thus, it will most likely be a slow recovery.

 

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