Editor’s Note: It doesn’t look good when a Deputy Director at the FDIC says that commercial real is going to “deteriorate” over the next several quarters. In my experience, all government officials give more optimistic forecasts so I would expect this decline to continue into 2011 and 2012.
Dow Jones, Washington D.C. - Problems in the U.S. commercial real-estate market are increasingly weighing on bank balance sheets, and regulators worry the trend could continue even if the economy turns around.
“Overall, there’s going to be a lag in the timing. We expect to see more deterioration,” said John Corston, acting deputy director of the Federal Deposit Insurance Corp’s complex financial institutions unit.
While residential mortgage loans and foreclosures have dominated headlines over the last two years, commercial real estate could be the next shoe to drop. The FDIC said Thursday the percentage of commercial loans at least 90 days past due outpaced residential mortgages during the second quarter, as noncurrent real estate construction and development loans increased by 16.6%.
The Office of Thrift Supervision, which released its second-quarter thrift results on Wednesday, has seen similar problems. The nation’s thrifts reported 12.5% of their construction and land loans were at least 90 days past due at the end of the second quarter, up from 7.2% a year ago.
“We expect commercial real estate to continue to deteriorate over the next several quarters,” Corston warned.
Regulators’ wariness over commercial real estate has been matched even by industry participants. A recent forecast of the National Association of Realtors suggested any recovery in the commercial real estate market is unlikely until the second half of next year. The group said it expects vacancy rates in the office, industrial and retail sectors to continue to climb through 2010, while rent levels continue to fall.
Richard Brown, associate director of the FDIC’s regional operations branch, said the loss of nearly 7 million jobs in the economy and lingering issues in the commercial mortgage-backed securities market have people worried even about income-producing properties.
“There’s distress there that we’re going to see in the next couple of quarters,” Brown said.
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