Historically commercial real estate cycles have often followed that of residential by several months and sometimes a few of years.
Writers Carrick and Lingling Wei have an interesting piece in yesterdayts Journal. If you have been following this blog, I have to ask doesn’t the graph on the below look very familiar?
Some banks have a special technique for dealing with business borrowers who can”t repay loans coming due: Give them more time, hoping things improve and they can repay later.
Banks call it a wise strategy. Skeptics call it “extend and pretend.”
Banks are applying it, in particular, to commercial real-estate lending, where, during the boom, optimistic borrowers got in over their heads to the tune of tens of billions of dollars.
A big push by banks in recent months to modify such loans—by stretching out maturities or allowing below-market interest rates—has slowed a spike in defaults. It also has helped preserve banks” capital, by keeping some dicey loans classified as “performing” and thus minimizing the amount of cash banks must set aside in reserves for future losses.
Restructurings of nonresidential loans stood at $23.9 billion at the end of the first quarter, more than three times the level a year earlier and seven times the level two years earlier. While not all were for commercial real estate, the total makes clear that large numbers of commercial-property borrowers got some leeway.
But the practice is creating uncertainties about the health of both the commercial-property market and some banks. The concern is that rampant modification of souring loans masks the true scope of the commercial property market weakness, as well as the damage ultimately in store for bank balance sheets….