Comml Real Estate Loan Delinquencies Inch Higher For Banks

While still a relatively small amount, delinquencies on commercial real estate loans are creeping higher on the balance sheets of U.S. banks.

The scope of the delinquencies in commercial property amid a deepening recession hasn't caught up with residential real estate, yet. And, banking analysts note that many banks classify loans to home builders as commercial real estate loans, skewing the delinquency numbers higher in this category.

That said, more mortgage loans for brick-and-mortar commercial properties such as office buildings, malls and hotels are becoming more distressed amid a continuing credit crunch. This poses a full-fledged dilemma for banks, while exacerbating financing constraints for the commercial real estate industry.

Gerard Cassidy, a banking analyst at RBC Capital Markets, said he is seeing rising delinquencies for commercial construction loans, normally provided to home builders, and for commercial real estate mortgages. But "commercial mortgage defaults are rising rapidly because of the weakness in the U.S. economy," and the problems in commercial property related to rising vacancy rates in strip malls, office buildings and hotels, he said.

Bank of America Corp. (BAC) currently holds $64.7 billion in commercial real estate loans, of which the bank said it considers $3.9 billion, or 6%, nonperforming. However, the bank said during its earnings report for the fourth quarter that 72% of its nonperforming commercial real estate loans are from home builders falling behind on payments amid a depressed residential market.

As such, about 1.5% of its non-home builder commercial real estate loans are in or near foreclosure. That compares with about 1.8% in the fourth quarter of 2007,when the bank didn't specifically separate home builder loans, which account for many of the losses.

Meanwhile, delinquent commercial real estate loan ratios - 90 days or more past due - for U.S. Bancorp (USB)rose to 3.34% during the fourth quarter from 1% in the year-earlier period, the bank said in its fourth-quarter statement.

"We believe commercial real estate loan...defaults from the end of the third quarter should increase...in the next 12 months four- to five[fold]," excluding construction loans, Cassidy said. He noted that regional banks including Zions Bancorp (ZION) and Cathay General Bancorp (CATY) are more vulnerable given their high exposure to commercial real estate loans.

Mounting concerns about bank exposure to such loans come as financing resources for commercial property are drying up, especially from the commercial mortgage-backed securities market. This sector had provided a significant source of financing for acquisitions and refinancing transactions in commercial property.

After the housing market crumbled more than a year ago, many industry experts predicted that commercial real estate would bend but not break like its residential counterpart. Indeed, these experts said it was unlikely that the market would experience the hardship endured in the early 1990s, when oversupply and an unfavorable tax policy created one of the worst industry crises in history.

But with the credit markets in lockdown mode, consumer confidence battered and the U.S. in a painful recession, industry watchers expect a commercial correction as severe or worse than that in the early 1990s.

Omotayo Okusanya, an analyst at UBS, said UBS is projecting that $400 billion in commercial real estate loans will come due this year with a refinancing shortfall of between $125 billion and $150 billion. "Some of these loans will end up in default, causing default rates to rise up the wazoo," Okusanya said.

He noted there are $3.5 trillion in commercial real estate loans outstanding and banks have about 40% of these loans on their balance sheets, while 26% are securitized in CMBS debt.

-By A.D. Pruitt, Dow Jones Newswires; 201-938-2269; [e-mail]

(Marshall Eckblad contributed to this report)

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