There seems to be some indication that the long-awaited commercial property market crash may not happen. US Banks are reporting that 90 day delinquencies are leveling and that more liquidity is coming into the market enabling delinquent loans to be refinanced. Rankin Commercial Properties indicates that institutional investors are coming back into the CRE market once again.
Mark Heschmeyer, writing in the CoStar Advisor, in an article titled, “US Banks Report CRE Loan Troubles Subsiding Amid Strong Quarterly Earnings” reports that:
It appears that commercial real estate adversity at U.S. banks has reached the high-water mark and is abating. According to the Federal Deposit Insurance Corp. (FDIC), second quarter numbers show 90-plus day delinquencies leveling and eventually set to decline because 30-89 day delinquencies are declining. Also, net charge-offs are leveling or declining. The only CRE distress levels still rising at banks is the amount of foreclosed assets, the total of which now stands at $29.77 billion, up from $7.4 billion two years ago.
Also, the banking industry’s quarterly earnings of $21.6 billion are up dramatically from the year-ago loss of $4.4 billion and represent the highest quarterly earnings since third quarter 2007.
Almost two out of three institutions (65.5%) reported higher year-over-year quarterly net income. And while the proportion of institutions reporting quarterly net losses remained high at 20%, it was down from more than 29% a year earlier.
“This is the best quarterly profit for the banking sector in almost three years,” said FDIC chairman Sheila C. Bair. “Nearly two out of every three banks are reporting better year-over-year earnings. As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend.”
Go here to read the full report.
Rankin Commercial Properties, in their quarterly report says
“For the first time in a long time, we are seeing significant activity in the Commercial Real Estate markets that suggest a fall out is no longer expected” said Charles Rankin, President of Rankin Commercial Properties. “Institutional buyers are stepping into investments helping the Dow Jones REIT index significantly outperform the broader market.” FTSE NAREIT’s All-REIT index, comprised of 148 publicly traded REITs, was up 11.7 percent year-to-date as of Aug. 26 while the Standard & Poor’s 500-stock index was down 4.9 percent. Publicly traded REITs represent 15 percent of the total U.S. commercial real estate market.
However, Rankin Commercial Properties forecasted a foreclosure rush earlier in the year which would have offset the scarcity of property acquisition opportunities, which has limited many REITs’ ability to grow as the economy recovers. “We thought a fall out would have been a good thing, a great thing for our business, but it never happened, now we are focusing on leasing properties and maintaining properties” said Charles.
Rankin Commercial Properties believes Apartments and Retail properties will outperform the market as Office properties and Industrial Properties begin moving off the bottom. But the fact that the commercial real estate market hasn’t crashed is overall positive.
You can read the full report from Rankin here.
These are not isolated reports. There have been other indications that liquidity is returning to the commercial real estate market.
Investors who are waiting for the market to bottom out may miss the bottom if they wait much longer. The market is starting to look like it is stabilizing at what might be the “bottom” before it starts its move back up.
According to Rankin:
“Overall Commercial Properties are ‘Back to Black’ meaning the cash flows are increasing enough to sustain properties and keep bankers from foreclosing. But significant growth remains weak primarily because the segment is recovering without a washout. We’ve seen a lot of loans rolled and very few foreclosures in recent months accompanied with stronger leasing activity.”
We can only wait to see how things progress in the coming quarter, but investors waiting for the bottom may well miss it and will have to jump in as the market starts to trend upwards.