Can banks avoid being swamped by bad real estate debt?
The US crime rate for commercial real estate loans from banks is also low: only 1.2 percent in the third quarter after 0.8 percent in the previous year, according to Trepp.
Banks could weather the current downturn better than the last as they have limited exposure to two of the hardest hit commercial property sectors: hotels and retail, Anderson said. And they are in better shape today after resisting the temptation to add marginal real estate debt like last cycle, he said.
“Unlike the Great Recession, there were really no major excesses anywhere,” he said. “Real estate was obviously overheated back then”.
Anderson predicts the local crime rate will rise to 2 to 3 percent in the fourth quarter. The length of the recession will determine where it goes from there.
“If it stays that way for a long time, the crime rate could continue to rise,” said Anderson. “That is the real question in 2021 – what the economy looks like at that point in time.”
When it comes to the state of the commercial real estate loan markets, low bank crime rates only tell part of the story. Arrears on loans wrapped in mortgage bonds or commercial mortgage-backed securities or CMBS have risen sharply since the pandemic began.
The CMBS crime rate in the Chicago area was 8.3 percent in October after 10.3 percent in June and 1.9 percent in February, according to Trepp. The crime rate was, in fact, 57 percent for hotel loans and 21 percent for retail. The Palmer House Hilton in the Loop was hit by a $ 338 million foreclosure lawsuit in August after a CMBS loan defaulted.
A wave of foreclosure actions by banks against commercial landlords is still pending. In one of the few major cases recently, First Midwest Bank sued Chicago for raising $ 23 million from the owner of the office space in a 41-story high-rise at 105 W. Adams St.
But the bank has given relief to many of its real estate borrowers through the CARES Act. In a recent investor presentation, the bank’s parent company, First Midwest Bancorp, reported that it had granted payment deferrals for 88 percent of its hotel loan portfolio for the first of two 90-day periods this year. In the second 90-day period, 45 percent of his hotel portfolio was put on hold.
The bank also granted deferrals on 59 percent of its retail real estate loans in the first period and 12 percent in the second period. The deferral rates for office, industrial and other commercial properties fell from 17 percent in the first 90 days to 3 percent in the second.
The recent news of the impending introduction of COVID-19 vaccines offers hope to landlords trying to hold onto and avoid credit problems. The question for many borrowers is whether the economic recovery will come quickly enough.
“Having the vaccines is great,” said Anderson. “There is a light at the end of the tunnel. But it will all take a while. “