Analyzing the Impact of Problem Commercial Real Estate

Analyst: Bill Bradway

May 6, 2010

After the residential mortgage market meltdown began in earnest in 2007, and which is still contributing to the earnings woes of many US banks, a range of opinions (e.g., from a looming disaster to overblown) over a follow on meltdown due to commercial real estate (CRE) delinquencies and foreclosures have been open to debate. For example, the Federal Reserve’s quarterly data reveals that delinquent commercial real estate loans have ballooned from 1% at YE2006 to 8% at YE2009. There is an important definitional element to the CRE debate. The Federal Reserve’s definition of CRE includes all construction and development loans and multi-family loans. The FDIC discloses these two loan types separately from non-farm commercial real estate, which includes property types such as hotels, office buildings, retail malls, industrial buildings, etc.

FDIC insured institutions held about $1 trillion of CRE loans on their books as of YE2009. This analysis examines the potential impact of the commercial real estate market’s problems on the US banking industry’s recovery and rate of bank failures. In addition, the upside potential for high risk-oriented CRE investors and the role that targeted business applications and services can deliver as the CRE market works through its own recovery cycle are also relevant to this subject.

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