We expect banks holding commercial real estate loans will feel more pain in 2010, with real estate values having plunged.
A majority of commercial loans due through 2014 appear to be underwater, meaning more banks will be forced to restructure loans to avoid costly foreclosures.
U.S. banks hold a historic $1.3 trillion of commercial mortgages outstanding as of Sept. 30, with about $60.5 billion of them delinquent. Approximately $650 billion in banks' boom-time commercial real estate loans are coming due over the next four years, with more than $150 billion maturing in 2010.
A significant number of commercial mortgage loans are underwater because real estate property values have dropped significantly. Even for loans that are performing on a cash-flow basis, when they hit maturity, it is going to be difficult to refinance them without additional equity. In today’s market that additional equity is often difficult to find and fund.
A key factor affecting the commercial real estate market will be the depth of any credit meltdown over the next 4-5 years and how quickly does a recovery take place. When you have high levels of unemployment, you're probably also going to see higher vacancy rates. This is going to put pressure on rents.
Unlike the residential mark that is beginning to dog paddle, the commercial markets have treacherous waters ahead.