TWO OF America’s biggest banks, Morgan Stanley and Wells Fargo, yesterday threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loans.
The disappointing second-quarter results for two of the largest lenders and investors in office, retail and industrial property across the US confirmed investors’ fears that commercial real estate would be the next front in the financial crisis after the collapse of the housing market.
The failing health of the $6,700 billion (€4,700 billion) commercial property market, which accounts for more than 10 per cent of US gross domestic product, could be a significant hurdle on the road to recovery.
Colm Kelleher, Morgan Stanley’s chief financial officer, said he did not see the light “at the end of the commercial real estate tunnel yet”, after the bank reported a $700 million writedown on its $17 billion commercial property portfolio in the second quarter.
“Peak to trough, you have already had a pretty nasty correction in the market, but it is still not looking very good at the moment,” he said after Morgan Stanley reported its third consecutive quarterly loss.
Wells Fargo saw non-performing loans in commercial real estate jump 69 per cent, from $4.5 billion to $7.6 billion in the second quarter as the economic downturn caused developers and office owners to fall behind in their mortgage payments.
Shares in the San Francisco-based bank were down more than 3 per cent at $24.55 in the early afternoon in New York as the increase in commercial non-performing loans undermined news of its best-ever quarterly profit. Morgan Stanley shares dipped before moving higher.
Ben Bernanke, chairman of the Federal Reserve, was repeatedly questioned by lawmakers on commercial real estate while testifying at Congress yesterday.
Mr Bernanke warned that a continued deterioration in commercial property, where prices have fallen by about 35 per cent 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”.
The widespread weakness in commercial real estate is a crucial issue for US banks, especially regional lenders that ramped up their exposure to local developers in the easy credit boom that preceded the crisis.
“The commercial real estate market is soft, and most of the big banks are seeing the same kind of thing,” said Howard Atkins, chief financial officer of Wells Fargo.
