Weakness, Trouble Remain but Healthy Lenders Could Carry CRE Markets to Better Days
Although first quarter results of U.S. bank holding companies across the country are unmistakably downbeat about the short-term outlook for commercial real estate in general, and their portfolios in particular, they also hint at a growing sense that the problems are working themselves out.
For starters, banks generally reported that troubled loan assets were systematically moving through their books. For example, older construction loans on commercial developments and owner-occupied properties were being shifted to term loans, giving borrowers a chance to work through slow cash flow periods.
Banks were also widely reporting that the inflow of new nonperforming commercial real estate loans was beginning to slow down. At the same time, more of the loans already being labeled as nonperforming were being shifted to the real estate owned (REO) category. From there, it is likely only a matter of time before those assets would be sold back into the marketplace.
In the performing section of their portfolios, banks reported that a substantial portion of those assets have also already been renewed or restructured.
In its April 2010 Global Financial Stability Report, the International Monetary Fund contained a brighter outlook for bank losses in the near term, as expected write-downs on both the loan and securities books of U.S. banks decreased across the board compared to last fall, said Mark Fitzgerald, senior debt analyst for CoStar Group.
“These improved short-term losses are due primarily to two factors. First, signs of an improving economic environment have decreased loss expectations,” Fitzgerald said. “Second, some write-downs have simply been pushed forward, as external factors, including low interest rates, have enabled banks to push off distress into the future.”
In part because of that delay, the IMF report forecasts real estate loan charge-offs are still expected to increase in 2010 and may not peak until 2011. Continue reading “Potential for CRE Armageddon Fading”