Judging by their latest results, the next big problem for major US banks appears to be their interests in the commercial property sector: all $US6.7 trillion of it. This is while their problems with home mortgages, foreclosures and bad corporate loans show no sign of improving.

Some of America’s major banks, including Morgan Stanley, Well Fargo, Key Corp, Bank of New York Mellon, Regions Bank and US Bancorp have sent unwanted messages to American investors, markets and regulators that the commercial property sector is tanking quickly.

Money centre giants Morgan Stanley (which lost $US159 million in the second quarter overall) and Well Fargo (a $US3.17 billion profit) confirmed the mounting pressures on the US commercial property market when they reported large losses and surging bad loans in their second quarter reports.

US banks have already lost tens of billions of dollars in home mortgages and corporate loans (and been brought to their knees and saved by the US Government). Now poor quarterly figures for two of the largest lenders and investors in office, retail and industrial property across the US suggest that commercial real estate will be the next front in the financial crisis after the collapse of the housing market. And results from other banks support the notion of a commercial property implosion.

Shopping centres, office blocks and commercial industrial property are selling for huge discounts. General Growth, American’s second largest shopping centre operator is in bankruptcy and the John Hancock Building in Boston was earlier this year sold in a bankruptcy auction for $US660 million, half its purchase price three years ago.

Late last week, in a move little noticed by the markets, Macquarie CountryWide trust sold 75%% of its US holding of 86 retail properties for $US1.3 billion, or around 24% less than it had paid for them in 2005. Its exposure to the US has been cut from 70% to around 25% of its assets.

In recent events:

  • Morgan Stanley reported a $US700 million cut on its $US17 billion commercial property portfolio in the second quarter.
  • Well Fargo saw its non-performing loans in commercial real estate soar 69%, from $US4.5 bullion to $US7.6 billion in the second quarter.
  • Regions Bank, a big regional institution based in the Alabama, saw a $US1.7 billion jump in new problem loans and a $US977 million, or 60% jump in non-performing loans in the second quarter.
  • Keycorp reported rising commercial real estate loan losses: it set aside 31% more in provisions for bad loans.
  • US Bancorp, based in Minneapolis, said profit fell 76% to $US221 million and its set aside and charge-off for bad loans more than doubled in the quarter.
  • SunTrust, based in Atlanta, had a second quarter loss of $US164.4 million, compared with a year-earlier profit of $US530 million and non- performing loans were $US5.5 billion of loans, or a worrying 4.48% of all loans.

Earlier this month the Federal Reserve’s Associate Director of Banking Supervision and Regulation Jon Greenlee said, “…at the end of the first quarter [of 2009], about seven percent of commercial real estate loans on banks’ books were considered delinquent. This was almost double from the level a year earlier.”

Greenlee said there is about $US3.5 trillion of outstanding debt associated with commercial real estate, and banks had about $US1.8 trillion of that in their loan books. That means around $US126 billion of delinquent commercial mortgages on the banks’ books, so far. He said an additional $US900 billion represented collateral for securitised home loans through what’s called Collaterised Mortgage Backed Securities.

“The pace of property sales has slowed dramatically since peaking in 2007, from quarterly sales of roughly $195 billion to about $20 billion in the first quarter of 2009,” he said.

And on Tuesday, the softening commercial property market was a big focus of the questioning of Fed Chairman, Ben Bernanke in his Capitol Hill appearance.

Bernanke warned that a continued deterioration in commercial property, where prices have fallen by about 35% since the market’s peak and defaults have been rising sharply, would present a “difficult” challenge for the economy. He added that one of the main problems was that the market for securities backed by commercial mortgages had “completely shut down”, as it has for home mortgages.