PICOR Connect | Trends in Commercial Real Estate

The Road Ahead for Commercial Real Estate and the US Banking Sector

Posted on Wed, Sep 28, 2011

In a September 12, 2011 special report entitled "The Road Ahead for CRE and the US Banking Sector," Deutsche Bank researchers summarize the size and scope of commercial real estate's finance picture with insights for CMBS investors and others in the industry.

Sandy Monaghan, CCIM, Managing Director of Cushman & Wakefield's Capital Markets Group, provides these highlights of the report, which indicates a risk of significant losses still exists for the industry. 

  • The biggest impediment to a stronger recovery is weak job growth
  • The two largest commercial real estate sectors are office and retail, and both require trend or above-trend job growth to maintain rent growth
  • The lack of new supply coming online in the next few years will keep vacancy rates near current levels, even in light/moderate economic stress
  • One of the problems in ascertaining property values has been the general lack of transactions, especially in secondary and tertiary markets
  • The prices of class A properties in the best markets have risen more than 25% from their recessionary lows, which is attributable to the low level of interest rates, the scarcity value placed on such assets and the more positive fundamental outlook in these markets relative to the rest of the country
  • Since posting a local (to New York) high in the spring, the trophy property index has declined by 10%
  • Although the actual number of bank failures in this cycle remains well below the S&L crisis of 20 years ago (390 vs 828), the average size of the failed banks is much larger.  The current failed banks have had an additional $283B in assets
  • Problem commercial real estate loans are and have been a more serious issue for smaller banks than larger ones; in our view this is a function of the highly localized lending often done by smaller banks and the fundamental weakness inherent in secondary and tertiary markets. Another factor is simply that small banks generally have a much higher concentration of CRE loans than larger banks
  • Core CRE loans outnumber construction and development loans 4:1
  • The CRE loan delinquency among smaller banks ($1B to $10B in asset size) is 7.1%, which is slightly below that of the larger banks (>$10B in asset size) of 7.4%
  • CRE Loan Maturity ScheduleThe chart on page 14 illustrates that the majority of the CREloan maturities are held by the commercial banks, with the next biggest contributors being CMBS and insurance companies. While some of these loans may be extended, there is still almost $1 trillion of loans coming due soon, an amount that would easily strain a fully functioning market, much less an illiquid one. These maturing loans will provide many investment and lending opportunities for all levels of risk

Click this link for a copy of the Deutsche Bank report.

To reach a PICOR professional about commercial real estate in Tucson, Southern Arizona or Sonora, Mexico, contact Barbi Reuter.

To discuss these observations directly, email Sandy Monaghan.

Follow this link for more information on Cushman & Wakefield's Resolution Group, of which PICOR is a participant.

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Topics: Industrial, Commercial real estate, Investment property, Office, Distressed assets, Finance