There was a Congressional subcommittee hearing today -- in Atlanta. The House Committee on Oversight and Government Reform's Domestic Policy Subcommittee addressed the residential and commercial real estate market in the Georgia metropolis. Sadly, the meeting was not on C-SPAN, but I managed to skim through some of the prepared remarks by more than a dozen witnesses from judges to economists to bankers. I was particularly interested to hear what those testifying had to say about commercial real estate, as I think that market will be one of the big business stories of 2010.
Atlanta has been gravely damaged by the housing bubble's pop. As a result, it sort of makes sense that only one witness appears to have spent much time addressing commercial real estate. Luckily, it was Jon Greenlee, Associate Director, Division of Banking Supervision and Regulation at the Federal Reserve. So it's pretty high quality testimony.
His analysis is also rather broad, not focusing on Atlanta's commercial real estate as much as the bigger picture. His prepared remarks make one thing utterly clear: the Fed is keeping a very close eye on commercial real estate (CRE). And it's worried. CRE is a big market to watch. Greenlee notes that at the end of the second quarter, commercial real estate debt was approximately $3.5 trillion.
And here comes the bad news:
Also at the end of the second quarter, about 9 percent of CRE loans in bank portfolios were considered delinquent, almost double the level of a year earlier. Loan performance problems were the most striking for construction and development loans, especially for those that financed residential development. More than 16 percent of all construction and development loans were considered delinquent at the end of the second quarter.
It should be a really, really worrying statistic that 9% of all CRE loans are delinquent -- because it isn't that hard for most of these loans to make monthly payments. Commercial mortgages are generally structured differently from fixed-rate residential mortgages. Many require relatively low monthly payments for the term of the loan, with a larger balloon payment due upon the loans' maturity. So if a large portion of commercial borrowers can't even make those relatively easier monthly payments, then we'll see some far more serious problems once those balloons come due.
And that storm is coming. Greenlee also says:
Of particular concern, almost $500 billion of CRE loans will mature during each of the next few years.
$500 billion isn't a small number by anyone's standards. Don't expect these loans to be rolled over very easily either. Banks are still keeping clenching their wallets tightly, and the commercial mortgage-backed securities market remains largely closed. Speaking of CMBS, banks have a lot of it, and those delinquencies are increasing as well, says Greenlee.