Patrick Parkinson, the Federal Reserve’s Director of Banking Supervision and Regulation, testified before the Congressional Oversight Panel on the state of commercial real estate, including vacancy rates and prices, CRE debt and concentrations, and increasing refinancing risk.
Vacancy Rates and Prices
Vacancy rates on most CRE have stopped increasing, although they remained at elevated levels at the end of 2010, ranging between 13% and more than 16%. These levels are, on average, 5 to 6 percentage points above levels experienced in 2007.
CRE price stability ranges greatly among different types and locations of properties. Low-tier properties are still struggling from lack of demand and declining prices, while top-tier properties have seen price stabilization and some recovery.
CRE Debt and Concentrations
Outstanding CRE debt totaled $3.2 trillion at 3Q 2010. Of this amount, about one-half, or $1.6 trillion, was held on the balance sheets of commercial banks and thrifts, with an additional $700 billion held as collateral for CMBS.
Of the more than 300 commercial banks and thrifts that have failed since the beginning of 2008, more than three-fourths had CRE concentrations at year-end 2007. Almost 1,200 commercial banks, or 18 percent of all banks, had CRE concentrations at the end of the third quarter of 2010.
CRE lending, and ultimately concentrations, are more prevalent in the business models of smaller institutions, while relatively fewer larger institutions carried much CRE concentration.
At the end of the third quarter of 2010, almost 10% of CRE loans in bank portfolios were considered delinquent, a three-fold increase since the end of 2007.
Approximately one-third of all CRE loans (both bank and non-bank), totaling more than $1 trillion, are scheduled to mature over the next two years. This circumstance represents substantial refinancing risk as CRE loans typically have large balloon payments due at maturity.
Credit losses for bank CRE loans typically continue well past the trough of recessions, and the Fed expects this pattern to continue in this cycle. Since the beginning of 2008 through the third quarter of 2010, commercial banks have incurred almost $80 billion of losses related to CRE exposure, equating to a little over 5 percent of the average exposure outstanding during this time.
Given this historical experience and the recent improvement witnessed in the broader economy, it is estimated that banks have taken roughly 40% to 50% of the CRE losses that they will realize over this cycle.
According to a Fed survey completed in the third quarter of 2010, approximately two-thirds of the respondents were engaged in workout activity. Of note, respondents reported that almost three-fourths of loan modifications were performing according to their modified terms.
The survey also noted that the volume of future CRE workouts was estimated to increase by approximately 60% during 2011.
Read the full testimony.