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CRE Lending Remains Constricted, but Loosening for Office and Retail

Total Distressed CRE Bank Assets Swell to $244.7 Billion
May 26, 2010
On an absolute level, commercial real estate lending remained depressed through the first quarter of 2010 and loan portfolio credit quality further weakened. However, there were significant variations between lenders, property types and borrowers.

Overall, first quarter commercial and multifamily mortgage loan originations were 12% higher than during the same period last year. But they were 26% lower than during the fourth quarter of 2009, according to the Mortgage Bankers Association's (MBA) Quarterly Survey of Commercial/Multifamily mortgage originations.

The 12% overall increase in commercial/multifamily lending activity during the first quarter was driven by increases in originations for office and retail properties. When compared with the first quarter of 2009, the increase included a 98% increase in loans for retail properties, a 29% increase in loans for office properties, a 5% decrease in loans for multifamily properties, a 28% decrease in loans for industrial properties, a 46% decrease in hotel property loans, and a 68% decrease in health care property loans.

Among investor types, loans for conduits for CMBS saw an increase of 657% compared to last year's first quarter. There was also a 131% increase in loans for life insurance companies.

On the downside, commercial bank portfolios saw 4% decrease in loans year-to-year, and the dollar volume of loans for Fannie Mae and Freddie Mac saw a decrease of 49%.

"The results of the survey showed changes in commercial and multifamily origination levels varied significantly between investor groups. However, it's hard to draw conclusions based on first quarter numbers given seasonal effects, such as the industry's usual push to finalize deals before the end of the year, resulting in lower first quarter origination activity," said Jamie Woodwell, MBA's vice president of commercial real estate research. "Based on surveys from the Federal Reserve Board and discussions with lenders, there appears to be increasing capital available for commercial mortgages, but only limited demand for new mortgages from commercial and multifamily property investors."

Credit Quality
According to the Federal Deposit Insurance Corp.'s latest numbers, CRE credit quality continued to erode in the first quarter. Net charge-offs of real estate loans secured by nonfarm nonresidential real estate properties increased by $1.6 billion (155.5%). However, noncurrent real estate construction and development loans fell by $1.8 billion (2.5%). It was the second consecutive quarterly decline in noncurrent levels for both loan categories.

The total amount of troubled commercial real estate loans and foreclosed properties at commercial bank and savings institutions is up 33% from the first quarter of last year. The total topped $244.7 billion at the end of the first quarter compared to $183.6 billion a year ago.
  • The amount of delinquent nonfarm, nonresidential loans was up 59% to $95.4 billion.

  • The amount of delinquent owner-occupied property loans was up 51% to $23.2 billion.

  • The amount of delinquent multifamily loans was up 59% to $12.7 billion.

  • The amount of delinquent construction and development loans was unchanged at $82.1 billion.

  • The amount of foreclosed CRE was up 73% from a year ago to $31.3 billion.


The number of institutions on the FDIC's "Problem List" rose to 775, up from 702 at the end of 2009. In addition, the total assets of "problem" institutions increased during the quarter from $403 billion to $431 billion. These levels are the highest since June 30, 1993, when the number and assets of "problem" institutions totaled 793 and $467 billion, respectively, but the increase in the number of problem banks was the smallest in four quarters. Forty-one institutions failed during the first quarter.

Selected Bank CRE Lending Snapshots
Commercial real lending in March varied from bank to bank. The following summaries highlight the variations and latest CRE lending trends.
  • Citigroup -- In March, new commercial real estate loan commitments increased more than tenfold to $1.4 billion, compared with $132.4 million in the previous month. Loan renewals increased to $112.1 million, from $25.8 million in February. Average total CRE loan and lease balances rose to $23.8 billion, up from $23.3 billion in February.

  • Comerica Inc. -- Commercial real estate renewals increased in March from February 2010. The increase was concentrated in the Western states and Texas markets, partially offset by a decrease in the Florida market. Commercial real estate new commitments decreased.

  • Fifth Third Bancorp -- Average CRE balances decreased by approximately 0.7% in March 2010 compared to February 2010. New CRE commitments originated in March 2010 were $288 million, compared to $102 million in February 2010. Renewal levels for existing accounts increased in March 2010 to $964 million versus February 2010 at $392 million. Payments and dispositions of troubled CRE outpaced the volume of renewals and new originations in March causing the overall balances to continue to decline. As commercial vacancy rates continue to increase, Fifth Third continues to monitor the CRE portfolios and continues to suspend lending on new non-owner occupied properties and on new homebuilder and developer projects in order to manage existing portfolio positions.

  • KeyCorp -- There was no change in loan demand trends in the CRE segment during March. The CRE market outlook continues to be weak. KeyCorp continued to extend and modify existing credits given the lack of liquidity and refinancing options available in the CRE market. Renewal volume doubled from the February level to $560 million and is comparable to levels experienced in April and May 2009. Three-fourths of the renewal volume, totaling $420 million, was related to performing development projects for which refinancing options remain constrained. For CRE development projects, KeyCorp created a fixed-rate 3-5 year loan program to modify and extend qualifying loans for existing customers.

  • Marshall & Ilsley Corp. -- Construction and development concentrations continued to decline in-line with its goal of reducing credit exposure in this sector. Average CRE balances are expected to continue contracting due to portfolio amortization.

  • Regions Financial Corp. -- The focus in commercial real estate lending continued to be on renewing and restructuring real estate loans with existing clients versus active pursuit of new real estate loans. Renewal activity includes loan restructuring, remargining and repricing, based on the current credit quality of the sponsor, the performance of the project and the current market.

  • SunTrust Banks Inc. -- Average Commercial Real Estate loans decreased $192 million, or 0.9%, compared to the February average. Total CRE renewals and originations in March increased $252 million, or 77.5%, compared to seasonally low February activity. The majority of originations were associated with large commercial or corporate businesses.


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