Monday, February 1, 2010

Thomas Brown on Commercial Real Estate

Tom Brown of and Second Curve Capital has written a good article explaining why he thinks the CRE 'crisis' is overblown. Here is the beginning:

Might banks’ growing problems with their commercial real estate loans spark a rerun of the subprime mortgage debacle? A lot of pessimists seem to think so, but I doubt it.

Yes, banks are running into severe credit problems with their CRE portfolios, and, yes, those problems are costing shareholders plenty. But there’s a difference between a normal, cyclical credit downcycle and Armageddon II. As it is, banks are enduring a lot of CRE pain, and will keep on enduring pain for several more quarters. That does not mean the whole financial system is at risk.

To begin with, the term “commercial real estate lending” covers all kinds of different kinds of activities, from financing the development of strip malls to so-called “owner occupied” loans to small businesses. Some of those categories will have issues—but by no means all. So generalizations about CRE lending should be viewed with suspicion. On one end of the credit spectrum, yes, financing strip malls can be a risky proposition. But at the other, owner-occupied credits tend to be among the most solid in the lending industry. A bank’s mix of CRE exposure is often as important as its absolute level of exposure.

He continues on to make some excellent specific points, so it's well worth your time to read the entire article.