Bad bets on commercial real estate hurt banks

For Georgia banks, it could be a one-two punch.

After being pummeled by bad residential real estate loans over the past year, banks may face a second wave of trouble, this time tied to loans on commercial property like shopping centers and hotels.

Rating agencies and analysts are taking notice. Moody’s Investors Service this week changed its outlook for Synovus, Georgia’s second-biggest bank, from “stable” to “negative,” in part because of commercial real estate fears.

Also this week, Morgan Keegan lowered its earnings estimates for SunTrust, the state’s largest bank, citing several factors including “increasing signs” that credit problems will spread to the commercial loan sector.

Commercial real estate “is the new front for losses,” said Jeff Davis, a banking analyst for Howe Barnes, a Chicago-based brokerage firm.

Banking experts stress it’s not yet clear how bad the problems will be. Fourth quarter numbers, expected soon, may begin to shed some light. Davis said he expects a slow-developing crisis that might not bloom until later this year.

However, he said the problems should be more contained than what banks have seen with residential real estate. That sector, Davis said, rode a huge bubble over the past decade as consumers took on risk they didn’t understand.

“In commercial real estate, the lenders and developers are professional,” he said. “They just got too exuberant.”

The retail sector is particularly vulnerable, experts say, as consumers rein in their spending because of shrunken home values and mounting job losses.

A number of shops have already closed their doors, and retail experts expect many more to do so this year. Vacant storefronts means less rental income for shopping center owners, making it more difficult for them to make their loan payments.

United Community Bank, Georgia’s third-biggest bank, recently foreclosed on a 3-year-old shopping center in Clayton County and has listed the property on its Web site with a $1.7 million price tag. The 20,000 square-foot retail strip is less than half leased.

Bank officials declined an interview. But David Shearow, the company’s executive vice president and chief risk officer, issued a statement saying the bank has “only foreclosed on very small commercial properties in the Atlanta area.”

“However, we are watching the market closely and are concerned about rising vacancies,” he said.

Mark Kanaly, an attorney at Alston & Bird in Atlanta, said banks are right to worry. Commercial real estate, he said, “is absolutely the next body blow” for banks.

“I’m hearing from a number of different banks that their commercial real estate portfolio has become a problem, and regulators are taking a strong look at it,” Kanaly said. “It’s going to be a wave of trouble.”

Banks whose portfolios are heavily concentrated in commercial real estate could be in for rough ride, he said.

But not all commercial real estate loans carry the same risk, experts say. Some are relatively safe, such as “owner-occupied” loans in which a borrower’s business is housed in the building they’ve purchased. In theory, these borrowers have more incentive to make payments.

More risky are loans made to a borrower who doesn’t work in the building but is buying it to generate income.

Kris Cooper, a managing director in Atlanta for commercial real estate firm Jones Lang LaSalle, said problems are looming at retail property owned by investors who borrowed heavily to make the purchase, an all-too common occurrence in the days of easy credit.

Despite some overbuilt pockets, Cooper said metro Atlanta’s retail market remains sound. Other areas around the Southeast, including Florida and the Carolinas, have seen more problems, he said.

Analysts can only speculate which banks might fall into trouble. Davis, the Howe Barnes analyst, said SunTrust should be in decent shape. The bank was badly burned on commercial real estate 20 years ago, he said, and has been more conservative in recent years.

Columbus-based Synovus, on the other hand, could be more vulnerable, Davis said. The bank has built up a large commercial real estate portfolio that includes a pool of the more risky type of loans.

“They certainly have exposure in that area,” he said.

As of Sept. 30, Synovus reported $123 million in problem commercial real estate loans that were at least 30 days past due, while SunTrust reported $163 million in bad loans.

Some of the fears tied to commercial real estate may be overblown, said Walt Moeling, an Atlanta attorney who represents many of the state’s banks.

“There’s a tendency right now to overreact to every announcement,” said Moeling, who works at Bryan Cave Powell Goldstein. “We’re all spooked. The market is spooked, the public is spooked.”