Georgia banks bracing for major hit

Discussion in 'Economics' started by ByLoSellHi, Oct 18, 2009.


    Georgia banks bracing for major hit

    Banks dealing with bad residential real estate loans wary of potential commercial losses


    The Atlanta Journal-Constitution

    1:31 p.m. Saturday, October 17, 2009

    Even as many Georgia banks grapple with bad residential real estate loans, experts say a new danger lurks: a deteriorating market for shopping centers, office buildings and other commercial property.

    Most of Georgia's 300 small, community-based banks have relatively light exposure to these kinds of loans, experts say, allowing them to watch the coming crisis from the sidelines.

    But for banks already in trouble, commercial real estate losses will deepen the pain, said Jeff Davis, a banking analyst with FTN Equity Capital Markets Corp.

    "It's a pretty stiff kick," he said. "It will definitely contribute to failures, because so many banks are in a weak state because of overexposure to residential real estate."

    Since the summer of 2008, 24 Georgia banks have failed, more than in any other state. Several dozen more are in distress.

    For months, experts have said a wave of commercial real estate problems is on the way. Retail and office vacancies are rising, and remaining tenants are demanding lower rents. As a result, rental income is dropping and the value of properties is falling, making it difficult for borrowers to make loan payments and refinance loans when they come due.

    "Loans are not worth as much now," said Henry Lorber, an Atlanta consultant who advises banks on how to deal with troubled real estate loans. "All hell is going to break loose, because [borrowers] cannot refinance those loans."

    Georgia's community banks - small institutions with a handful of branches that mostly serve local customers - hold about $13 billion in commercial real estate loans, slightly more than the amount of loans tied to residential home building. But that figure is a bit misleading, because roughly half of commercial real estate loans are for "owner-occupied" properties, such as offices owned by dentists and doctors.

    Such loans are considered much less vulnerable than loans made to investors buying shopping strips or office buildings for the rental income, where the loss of even a few tenants for any extended period could spell deep trouble.

    Lorber figures many loans for retail and office property have already declined by 25 percent, with some losing half their value.

    Commercial real estate loans typically are short-term deals three to five years in duration. Many loans coming due over the next year or two were made at the height of the real estate boom, when rental rates and values were significantly higher, Lorber said.

    In normal times, borrowers simply refinance their loans, either with their existing bank or with a new lender.

    But borrowers stuck with property whose value has tanked or who are delinquent on payments will have difficulty finding a lender, Lorber said. A few borrowers have even abandoned properties, he said.

    Many banks are reluctant to foreclose on property because they'll have to get the property appraised and take a loss for any drop in value. But holding onto distressed property carries risks, Lorber said. Buildings will likely keep dropping in value, he said, and some could suffer damage.

    Georgia bank Web sites that list foreclosed properties are filled with houses and vacant lots up for sale but few, if any, commercial properties. Most commercial listings are modest in size. First National Bank of Georgia in Carrollton, for example, is trying to sell an 18,000-square-foot shopping center in Villa Rica for $1.1 million. Buckhead Community Bank lists a 14,000-square-foot office building in Suwanee for $1.4 million.

    Some Georgia community bankers say their institutions have little exposure to the strip centers and office parks most at risk.

    Douglas County Bank, for instance, has $98 million of commercial real estate loans on its books – but the pool includes only two strip shopping centers and no office buildings. Most of its commercial loans are for church expansions and to finance the operations of small businesses, using the property as collateral.

    "The hammer is starting to drop on commercial real estate, but it's not going to affect us anywhere near remotely like the residential market," said Billy Mayhew, the bank's president and CEO.

    The growing commercial real estate problem nationwide has regulators concerned. The Wall Street Journal recently reported that an official with the Federal Reserve Bank in Atlanta warned colleagues that he expected banks to be slow to recognize the severity of the losses to come from commercial real estate.

    And last week, U.S. Comptroller of the Currency John Dugan told a Senate banking committee that "the greatest challenge facing many banks is the continued deterioration in commercial real estate loans."

    Evidence of trouble in metro Atlanta's once high-flying commercial real estate market already abounds.

    The vacancy rate for retail space has risen almost 50 percent in the past two years, to 10.7 percent, according to real estate company CoStar. Advertised rental rates have dropped 5 percent over the past year, though that figure does not include renegotiated rents of existing tenants.

    The area's office market is struggling, too. The vacancy rate for office space has increased 15 percent in the past year, according to Richard Bowers & Co.

    While the figures are troubling, experts note that Georgia's community banks lent far more heavily to the home building industry, said Richard Gaudet, a principal with GlassRatner, an Atlanta financial consulting company.

    And he said banks have many more options in dealing with commercial property than homes. When a loan for a home or vacant lot goes bad, the bank can either sell the property or wait.

    Shopping centers and office buildings generate rental income, allowing banks to hold property until things improve or re-work the terms of a loan to help the borrower weather the downturn.

    And banks can always sell commercial property and take a relatively slight loss, Gaudet said, unlike the vacant subdivision lots strewn across metro Atlanta that have lost most of their value.

    Commercial real estate loans "don't stick to your balance sheet like [vacant lots] would," he said. "You can always move them at a price that's not completely insulting."