Sunday, January 31, 2010

The Canary in the Coal Mine: US Commercial Real Estate Values Showing Dramatic Declines

Many of the banks announcing 4th quarter 2009 earnings cite continued concerns about their commercial real estate (CRE) portfolios. One of the reasons for declining CRE credit quality is a drop in the value of the underlying real property. This mirrors the challenge being faced by homeowners; as home values decline, borrowers end up owing more money on the property than it is worth.

The Moody’s/REAL commercial property index (CPPI) tracks the value of commercial real property over time. The index is unique in that it tracks same-property round-trip price changes based purely on the documented prices in completed, contemporary property transactions. The index was established in January 2001 with a base value of 1.00. National commercial real property values are currently down 42% from their 3rd quarter of 2007 peak. (Click on image to enlarge).
While the index dropped more than 10% in the 3rd quarter for apartment and office buildings, retail buildings rose 2.5%. While one data point does not represent a trend, the national index (published monthly) showed a 1% increase in November, the first monthly increase since September 2008. The original data can be found at: MIT Center for Real Estate.

Stay tuned. The trend in commercial real property values is an important indicator of how commercial real estate lending portfolios will fare in 2010.

Monday, January 25, 2010

Update: Business Lending Performance by the Top 22 TARP Recipients

Banks continue to be criticized for a lack of lending to US businesses, especially small businesses. As these banks digest sweeping proposals from President Obama affecting their industry, let’s take a look at the latest data on lending activities by financial institutions who received capital infusions under the government’s TARP program.

Since I last looked at this data, the overall level of loans outstanding by business borrowers continued to decline. Since program reporting began in February 2009, the average loan balance outstanding has decreased 10.2%. The latest data indicates that balances are stabilizing, but we need a few more months of data to see if this trend continues. (Click on image to enlarge)

Since program inception, commercial and industrial (C&I) loans outstanding declined 14.2% while commercial real estate (CRE) loans held steady. Looking at new originations, new loan originations have risen steadily since August, driven by a 53% increase in new C&I loans. Unfortunately for small businesses, these new loans were made to larger firms.

Looking at small business data separately, loans outstanding fell 4.5% since April, while new originations are trending downward.

Unfortunately, the rate of decline in small business lending by the top TARP recipients continues to accelerate; a bad sign for struggling small businesses.

Friday, January 15, 2010

SBA Recovery Act Loan Programs Continue to Gather Steam

As previously discussed in this blog, The American Recovery and Reinvestment Act of 2009 (Recovery Act). The Recovery Act contained a number of provisions intended to spur small business lending through SBA loan programs. In November 2009, the SBA began running out of funds for the program, and began preparations to dismantle the Recovery Act programs. Luckily, on December 19, 2009 President Obama provided an additional $4.5 billion in funding for the 7(a) and 504 loan programs which provides payment of certain loan fees and higher SBA 7(a) guarantees.

Due to uncertainty regarding continued funding for the SBA Recovery Act programs, banks and small businesses rushed to complete loan applications in November. As shown in Exhibit 1, this increased volume resulted in a 56% increase in loan originations from October to November. However, growth in SBA loan originations has not been steady; October originations fell almost 27% from September. (Click to enlarge image)

The SBA estimates that funding will be available for Recovery Act loan activity through the end of February, 2010. When funds are close to being exhausted, the SBA will again begin to transition back to standard SBA lending programs. Hopefully, banks and borrowers will find a middle ground on credit quality standards and SBA origination volumes will continue to climb.

Sunday, January 10, 2010

Latest FRB Senior Loan Officer Opinion Survey Shows Continuing Improvement in Business Lending Conditions

The Federal Reserve Board October 2009 Senior Loan Officer Opinion Survey reflects continued improvement in loan demand and loosening of loan standards, for businesses of all sizes. The loan standards category includes pricing, maximum maturity, amount of credit lines, and loan covenants. Banks continue to have little tolerance for risk and are closely monitoring economic conditions in their geographic regions. Loan demand by businesses remains slow as a result of depressed sales and high unemployment. (Double click on image to enlarge.)

Although demand is beginning to improve, C&I and CRE outstanding balances fell month over month throughout 2009. Data from the Federal Reserve’s weekly sampling of 875 commercial banks for C&I and CRE outstanding balances shows an overall decline of 10.7% for 2009. During 2009, CRE loans declined 6%, while C&I loans declined almost 16%.

With the unemployment rate stuck in double-digits, I believe it will be several more months before business borrowing picks up substantially. For the economy’s sake, I hope I’m wrong.