What Commercial Real Estate Threat?  The Recovery Has Begun

The Wall Street Journal

That cetainly sounds like the conclusion of the dozen or so large and midsize banks that gathered this week in New York for a Barclays investor conference.

“Following commentary from our financial services conference, we believe commercial real estate prices may have bottomed for the time being, resulting in no meaningful markdown” of assets in the third quarter, says Barclays banking analyst Roger Freeman today in a research note about Goldman Sachs Group.

The statement was part of Freeman’s reasoning for getting more bullish about the coming third-quarter earnings from Goldman Sachs Group. It raised his earnings estimate to a range of $3.90 to $4.50 a share, compared with the consensus estimate of $3.65-a-share.

Other banks are also getting more confident about their real-estate exposure, even about the biggest problem areas such as construction loans to home builders. At the conference, Marshall & Ilsley said its construction loan delinquencies are showing signing of flattening in the third quarter. City National said its homebuilder book also is showing signs of stabilizing.

“Almost every bank said their CRE portfolio should relatively outperform,’’ wrote Freeman’s Barclays colleague, Jason Goldberg in a research note from the conference on Thursday.

However, Goldberg added parenthetically ” (not sure how that works).”

Deal Journal isn’t sure how it works either.

The commercial real- estate market seems like it still has a long way to fall. Even signs that the economy is improving isn’t likely to lead to quick reversal in high vacancy rates in the office market, where much of the distress is being felt . That is because hiring likely will lag behind other economic indicators in the early stages of any recovery.

Also putting pressure on values are the increasing delinquencies in $700 billion commercial mortgage-backed securities market.

By the end of 2012, close to $100 billion of the loans that comprise CMBS are likely to face difficulty being refinanced because real-estate values have fallen so far that the borrowers won’t be able to extend existing mortgages or replace them with new debt.

As this leads to foreclosures, it will further depress values of the $1.7 trillion in commercial real-estate loans sitting on bank balance sheets, leading to more write downs.

For the most part, banks have been able to contain commercial-real-estate losses by extending debt when it has matured so as long as the property owner can make interest payments. But that is likely going to get harder as rents decline, leaving the borrowers with less cash.