CRE Mauling to Continue

Representative Carolyn Maloney (D-NY), the head of the congressional Joint Economic Committee, is on record as believing that commercial real estate (CRE) is a ticking time bomb, as funding for commercial loans were virtually shut down last year when the financial system became paralyzed, with financing of even health properties remaining extremely difficult to obtain.

Commercial loan delinquency rates have doubled to approximately 7.0% year over year. Add to the mix that owners of shopping malls, hotels and offices have been defaulting on loans at a significant rate, its is understandable why General Growth Properties (GGWPQ), the second largest owner of shopping malls, sought Chapter 11 bankruptcy protection.

Clearly, as more companies downsize and retailers close their doors, small and regional banks may experience substantial risk of severe losses from commercial real estate loans. The pressures are not expected to improve until economic improvements are experienced -- specifically, when consumers and businesses start spending money again.

With unemployment hitting 9.5% in June 2009, new construction projects have come to a virtual standstill, which moderates the number of construction jobs that are being worked on and moderates tax revenue for local governments. Currently, the national commercial real estate market is not expected to hit bottom for at least three years.

Recently it was noted that the Federal Reserve has been focusing commercial real estate loans banks' books as losses from the sector continue to expand. As such, the Fed has expanded its training of its bank examiners in order to be prepared to deal with rising losses from the commercial real estate industry.

While small and regional banks would experience hits, institutions such as (but not limited to) Citigroup (C - Analyst Report), Bank of America (BAC - Analyst Report), Wells Fargo (WFC - Analyst Report), JPMorgan Chase (JPM - Analyst Report) and US Bancorp (USB - Analyst Report) as well.

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