While we are all well acquainted with the housing bust, commercial real estate is another area that experienced a slew of problems. Regional banks and exchange traded funds (ETFs) that target both sectors may be taking some hits.
Analysts expect more problems in commercial real estate, which includes mortgages on office and apartment buildings and shopping malls, along with construction, development and industrial loans, reports Colin Barr for CNN Money. U.S. banks currently hold around $1.8 trillion in commercial loans and poor economic conditions have observers fearing that a chunk of these loans will go bad.
Higher credit costs already led to second-quarter losses in regional banks. Banks have been buttressing their reserves for potential future credit losses. However, more borrowers are falling behind on loans and some question whether the reserves will hold. Thin reserves mean some banks could “face material provisions ahead,” which could eat away at profits over the next year.
Some real estate players claim banks are just sitting on bad loans instead of liquidating them. This trend potentially suppresses new lending and intensifies the problems in a falling market. Meanwhile, bankers blame weak loan demand and deny their hand in troubled credits.
The banking industry has raised billions of dollars in new equity, but some expect problems ahead, which is adding to price declines. For example, office rental rates dropped 23% in New York and 11% in Washington from 2008 highs. Vacancy rates increased 14% in Manhattan and 11% in Washington in the first quarter.
- SPDR KBW Regional Banking (KRE): down 31.2% year-to-date