NEW YORK (Reuters) – The suddenly red-hot financial sector shrugged off the bankruptcy of No. 2 U.S. mall owner General Growth Properties Inc, but the commercial real estate downturn it signals could haunt U.S. banks — especially regional ones — in the months to come.
The meltdown in office and other nonresidential properties has already squeezed U.S. financial companies, with banks from Goldman Sachs Group Inc, to Citigroup Inc and insurers from American International Group to MetLife Inc reporting billions in writedowns.
But the biggest real estate failure in U.S. history could still foretell greater-than-expected pain ahead for banks in the real estate arena.
“General Growth Properties is basically a message to the rest of the financial world that this is going on, because there are lots of small deals, ones that don’t gather the sort of attention that General Growth (has), that are having difficulties,” said James Ellman, president of hedge fund Seacliff Capital.
General Growth’s collapse is unlikely to be the last by a major U.S. developer as most are finding few sources of funding for sales or to refinance maturing debt.
About $814 billion of commercial mortgage debt is expected to mature over the next two years, according to real estate research firm Foresight Analytics.
“The outlook has worsened,” said Anton Schutz, president of Mendon Capital.
In addition, banks could also be forced to renegotiate some loans in order to avoid further losses.
“The banks not necessarily want to own the shopping centers. Prices are very low, so the banks may be under pressure to give more leeway to stressed mall operators or shopping centers operators to continue to operate with the hope they can get through the recession rather than seizing the property, selling it at a fire sale price and having to suffer a large loss,” Ellman said.
ANOTHER HEADACHE FOR REGIONAL BANKS
Brokerage house Fox-Pitt Kelton estimated that commercial real estate represented in average 23 percent of the loans of the almost 60 banks it covers, with as much as 57 percent in the case of PacWest Bancorp.
It said banks still need to record $63 billion in construction and commercial real estate losses, or 83 percent of the estimated total losses in that business.
In addition, Fox-Pitt said regulatory data for the top 100 banks suggested construction and commercial real estate losses were 2.39 percent and delinquencies were 5.27 percent in the fourth quarter, still far below the historical peaks of 4.46 percent, and 17.16 percent, respectively, from the early 1990s, when these loans were the primary source of credit turmoil.
Regional banks could be some of the main victims.
“They have financed smaller properties in their communities, little malls, or regional centers, and those are certainly getting affected as you are having retailers retrenching … and obviously the ability for malls to carry their debt service weakens,” Schutz said.
Fox-Pitt estimated BB and T Corp, Commerce Bancshares Inc and Sterling Bancshares Inc still need to realize between 94 and 95 percent of their construction and commercial real estate portfolio.
Beyond regional banks, even Wall Street stars seem to be in trouble. Earlier this month, Barclays Capital analyst Roger Freeman estimated Morgan Stanley could incur in $2.6 billion losses from its real estate investments.
Goldman Sachs and Sanford C. Bernstein cut the Wall Street’s bank earnings forecast citing higher writedowns in its commercial mortgage backed securities and its real estate investment portfolios.
But their are not alone. Among the largest commercial banks, Fox-Pitt estimated Bank of America Corp’s future losses related its construction and commercial real estate portfolio represented 5 percent of its common shareholders equity.
“There is a fear that the provisions haven’t been fully taken yet,” said Thomas Russo, principal at Gardner Russo and Gardner.
Bank of America, Morgan Stanley, Sterling Bancshares, BB and T, and Commerce Bancshares declined to comment.
(Reporting by Juan Lagorio; Editing by Andre Grenon)