Nov
19
NEW YORK (Reuters) – Sooner or later, office buildings and other commercial real estate financed during the credit bubble will generate hurricane-scale losses for banks.
Banks in recent years have been hammered by losses on home mortgages, buyouts and corporate defaults. Now, lenders face big losses from loans backed by commercial real estate, where a stagnant economy will eventually take its toll, financial services executives told the Reuters Global Finance Summit.
“The commercial real estate business still has not been marked down. It’s not been marked to market,” Cantor Fitzgerald LP Chief Executive Howard Lutnick said. “The economy can’t, in my opinion, grow fast enough that the tenants are going to go out and start hiring and growing and building and take up all these rents at $60 a foot. It’s nonsense.”
U.S. banks held $1.65 trillion of commercial real estate loans on their balance sheets as of November 4, according to the Federal Reserve. Total assets were $11.8 trillion.
Yet banks have postponed their day of reckoning, extending loans in hopes the economy will improve and demand for space will rebound. Banks have resisted selling assets, or taking them away from underwater borrowers, in fear of setting a new and lower market price.
It is a strategy neatly summarized as “a rolling loan gathers no loss,” Lutnick quipped.
Lutnick, whose firm is now building out a real estate restructuring business, noted the equity invested in almost every transaction during the peak bubble years of 2005 through early 2007 has been wiped out. Lenders are under deep stress, because the value of their collateral has fallen.
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