Are Commercial Real Estate Loans Hurting Banks?

Article By Sue Kirchhoff Via USA Today

Commercial real estate has surged after several down years.  But it's worrying federal officials, who note many banks are carrying a heavier concentration of real estate loans today than they did during a heady 1980s boom — a boom that ended in a bust, forcing many lenders out of business.

Nationally, in the mid-'90s, 15%-20% of federally insured banks had what regulators consider a heavy load of commercial real estate loans. In 2005, it was 40%, the FDIC says.

Tightening Loan Standards
Determined to avoid a reprise of the 1980s, regulators are tightening standards for commercial real estate lending. While such loans are generally performing well and bank profits are healthy, Bies and other officials warn that the industry is entering a time in which problems are most likely to crop up. Interest rates are rising and a wave of just-completed office, condo and other buildings are coming to market, which could affect rents and prices.

Construction Picking Up
Commercial real estate slowed several years ago but has been coming back. U.S. office vacancy rates, now the lowest since the 2001 recession, will average 11% by the end of 2006. That's down from more than 14% in 2005.

Taking Account of Risks
Overbuilding can force down rents. Rising interest rates may make it more difficult to sell a property or complete a project. Foreign capital and pension funds chasing investment properties, along with banks competing for business, may push prices too high and erode lending standards in some areas.

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