Lesley Deutch, VP at John Burns Real Estate Consulting, gives a very negative outlook for commercial real estate in this week's Advisor Perspectives newsletter. She argues the fallout in commercial real estate will hit commercial banks harder than residential mortgages. One of the reasons for this is that banks hold a much greater percentage of commercial mortgages than residential mortgages.
Commercial banks hold about 45% of all commercial real estate mortgages, compared to 21.3% of residential mortgages (though residential mortgages are a bigger market). Deutch expects banks to recover less than 20% of their CRE loans and predicts government involvement to exceed what we've seen so far. I doubt much of these losses will come from further declines in prices, which seem to have bottomed:
The problems for banks will come from recognizing existing losses on their books, which are being recognized very slowly (see this WSJ article). If banks are to recover less than 20%, there are still significant losses to come (from a Cleveland Fed report on Bank exposure to CRE):
CRE losses are already taking up a significant amount of bank capital:
The fallout in commercial real estate may also affect residential real estate as banks may have to sell land to clear capital for CRE losses. Housing has enough problems as it is:
