NEW YORK (TheStreet) -- The commercial real estate apocalypse that industry analysts feared would hit banks has not yet happened. But that does not mean the problems associated with the segment have gone away, according to analysts.
Credit quality has started to improve for the commercial real estate sector and with housing market showing signs of a double-dip, there are still more renters than buyers. That augurs well for vacancy rates and cashflows in the commercial real estate segment.
"Our feeling is that the heavy lifting of charging off the most severe commercial real estate loans is behind banks," said Peter Winter, analyst at BMO Capital Markets. "We still expect problems in commercial real estate but they won't be as severe because most of the problem commercial real estate loans now are income- producing, as opposed to construction and development loans that produced no cash flow."
Winter also said that the pickup in demand for distressed loans in the secondary market was a good sign for banks looking to offload their problem loans.Matt Anderson, managing director at Trepp, a provider of commercial mortgage information and analytics also agrees that the problems aren't as severe as before because banks have shored up capital and shrunk their commercial real estate exposure. But he says banks with a high concentration to commercial real estate are still at risk, especially if the economy slips into a double dip recession. "A double dip would have a detrimental impact on the sense of recovery in the commercial real estate market.," he said. "Banks have been able to take charge offs on problem loans but have been able to replenish capital with earnings. But their ability to earn their way out might suffer in a double dip." "Banks have been cutting down on provisioning," he added. "For the most part banks think they have provided for future losses. The economic outlook will have an impact there too. Banks might have to increase their provisions again which they are hoping they won't have to do." The potential losses from commercial real estate are staggering. About $1.7 trillion worth of commercial mortgage debt is expected to mature between 2011 to 2015, of which more than half is expected to be underwater or close to underwater, according to Trepp. More than $250 billion of those mortgages are likely to be underwater by at least 20%. While large banks have been successful in reducing their exposure, there are still several regional banks with a heavy concentration in the sector. And although banks have already taken significant losses from commercial real estate loan portfolios, not all of the losses have been recognized. Banks have chosen to give borrowers more time to pay back their loans in the hope that things might improve and they will recover their loans. This way they avoid having to foreclose and sell property at fire-sale prices. Critics, however, say it is just a case of "extend and pretend" practices - extending the maturity of a loan and pretending its underlying value has not declined. Regions Financial (RF) recently was in the spotlight on news that its board was investigating whether executives delayed disclosure of loans going sour during the financial crisis. Another practice that has attracted scrutiny from the Federal Reserve involves one that breaks up a loan into performing and non-performing parts, which has the effect of understating nonperforming loans. If regulators force banks to recognize problem loans more quickly, that could pose another risk to banks, according to Anderson. Here are five banks that have a high exposure to commercial real estate. The banks are ranked in the order of the proportion of nonperforming commercial real estate loans in relation to capital. All data has been sourced from SNL Financial. Only banks with assets of more than $10 billion have been considered in TheStreet's screen.
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