High vacancy rates and low property values in the commercial real estate sector continues to hamper overall growth in the economy, one top banking official testified today.
Patrick Parkinson, director of banking supervision and regulation at the Federal Reserve Board, told members of the Congressional Oversight Panel construction of nonresidential structures continues to lag because of weak fundamentals in the sector, including high vacancy rates and low property values, which are unlikely to change in the near term.
"Credit losses for bank CRE loans typically continue well past the trough of recessions, and we expect this pattern to continue in this cycle," Parkinson said. "Working through the large volume of troubled CRE loans will take time as banks go through the difficult process of loan workouts and loan restructurings."
At the end of the third quarter of 2010, approximately $3.2 trillion of outstanding debt was associated with CRE, including loans for multifamily properties, Parkinson said. Of this amount, about one-half, or $1.6 trillion, was held on the balance sheets of commercial banks and thrifts.
Parkinson said approximately one-third of all CRE loans, both bank and non-bank, totaling more than $1 trillion, are scheduled to mature over the next two years. This circumstance represents substantial refinancing risk as CRE loans typically have large balloon payments due at maturity, he noted.
In an effort to encourage prudent CRE loan workouts, especially among maturing loans, the Federal Reserve issued interagency guidance in October 2009 for loan restructurings and workouts, Parkinson said. The agency is also working with the FDIC and the OCC to collect more CRE data to develop more accurate stress test parameters.