For Banks, More Trouble Just Around the Bend

This is the first of a two-part look at banks that could suffer from their exposure to nonperforming commercial real estate and construction loans. Part II looked at smaller banks.

Commercial real estate and construction loan default rates are on the rise, presenting a new problem area for an already reeling banking sector.

Delinquencies in commercial real estate loans are still historically low, but are rapidly increasing, according to a recent JPMorgan Chase report on commercial mortgage-backed securities (CMBS). Analyst Alan Todd said that retail delinquencies of 60 days or more were 0.40% in October, increasing from a low of 0.08% in July 2007. Over the same time period, office delinquencies increased to 1.29% from 0.47% and multifamily delinquencies increased to 0.28% from 0.11%. The report also noted commercial property prices had only fallen 11% from their peak, and were expected to fall 30% to 40% "over the next few years."

The JPMorgan report encompassed the entire CMBS market, and commercial loans that are securitized tend to be underwritten to tighter standards. If we narrow our focus to loans that haven't been securitized but are still held by banks, the numbers are more alarming.

According to preliminary third-quarter bank call report data provided by Highline Financial on Dec. 3, nonperforming commercial real estate (CRE) and commercial construction loans (CCL) comprised 2.56% of total CRE and CCL, up from 2.17% in June and 0.95% in September 2007.

"Nonperforming" loans are past due 90 days or more, or placed in nonaccrual status since the banks don't expect full repayment of principal. Looking at loans delinquent 30 to 89 days but still considered "performing," there were another 1.11% in problem CRE and CCL as of Sept. 30.