More than the next few years, a wave of commercial real estate loan failures could threaten America’s currently-weakened financial technique. But some elements of the structure of the commercial real estate markets, like the heavy reliance on CMBS (themselves backed in some cases by CDS) and the fact that at least a single of the nation’s largest financial institutions holds a substantial portfolio of issue loans, mean that the potential for a larger impact is also present.
Although numerous analysts and Treasury officials think that the commercial real estate issue is one particular that the economy can handle through, and analysts believe that the existing condition of commercial real estate, in isolation, does not pose a systemic risk to the banking system, rising delinquency rates foreshadow continuing deterioration in the commercial real estate market place.
The commercial real estate industry is currently experiencing considerable difficulty for two distinct causes. To make matters worse, the credit contraction that has resulted from the overexposure of economic institutions to commercial real estate loans, particularly for smaller regional and community banks, will result in a negative feedback loop” that suppresses economic recovery and the return of capital to the commercial real estate industry.
The borrower will have tiny incentive to maintain a house that is with no equity and is not generating adequate revenue to service the debt, specifically if he does not anticipate the cash flow scenario to improve because of increasing vacancy prices and falling rental rates. Foresight Analytics, a California-based firm specializing in real estate industry study and evaluation, calculates banks’ exposure to commercial real estate to be even larger than that estimated by the Federal Reserve.
Rising vacancy prices and falling rental rates present troubles for all commercial real estate loans. For financial institutions, the ultimate influence of the commercial real estate whole loan difficulty will fall disproportionately on smaller regional and community banks that have higher concentrations of, and exposure to, such loans than larger national or money center banks. Simultaneously, higher quality commercial real estate projects tended to secure their financing in the CMBS industry. Loan dangers for borrowers and lenders fall into two categories: credit risk and term danger.