The largest number of bank failures in nearly 20 years has eliminated jobs, accelerated a drought in lending and left the industry’s survivors with more power to squeeze customers.

Some 279 banks have collapsed since Sept. 25, 2008, when Washington Mutual Inc. became the biggest bank failure on record. That dwarfed the 1984 demise of Continental Illinois, which had only one-seventh of WaMu’s assets. The failures of the past two years shattered the pace of the prior six-year period, when only three dozen banks died.

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This issue of Research Matters delves into the absence (or near absence) of distressed sales. Almost two years into one of the most dramatic downturns to ever hit commercial real estate, the “tsunami” of troubled real estate that was expected to hit the market has largely failed to materialize.
 
The Numbers to Date

As the chart below shows, total cumulative distressed real estate at the end of July was just over $189.1 billion. Distress is defined as either REO (real estate owned) or troubled real estate. Since the beginning of 2008, monthly additions to distressed real estate have averaged $8.5 billion, although July was just $5.0 billion and the lowest monthly increase since October 2008. This, combined with nearly $4.0 billion of restructured or resolved real estate in July, resulted in a net increase of just over $1.0 billion in distressed real estate. This raises the question whether outstanding distressed real estate has peaked?

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Pessimism over the U.S. commercial real-estate market continued Monday as Moody’s Investors Service reported prices declined 3.1% in July from a month earlier and Standard & Poor’s Ratings Services said a near-term comeback for the sector “isn’t likely.”

Prices of commercial properties, such as office buildings and shopping centers, have stabilized but in July were 43% below their peak in 2007. Rental demand has diminished and credit has tightened since the heyday of several years ago, making it harder for commercial landlords to keep up with interest payments, refinance existing debt or sell property at a profit.

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Real-estate funds saddled with tens of billions of dollars of boom-time properties are beginning to get some relief from Wall Street firms and other investors hoping to capitalize on their need for cash.

Opportunistic investors are buying stakes in troubled funds at steep discounts or lending the funds money in deals that give them a steady return and potentially a share in the profit if real-estate markets rebound. At the same time, some funds are succeeding in persuading existing investors to cough up more capital, although this typically is an uphill struggle.

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The CoStar Commercial Repeat-Sale Indices (CCRSI), produced by CoStar Group, found that investment-grade property continued to decline in value for the second straight month in July.

Properties of sufficient quality and size for inclusion in large institutional portfolios saw their value decline by 5.05% during the month following a similar dip in June. The cumulative drop of nearly 10% over the two-month period nearly offsets the strong 11.78% increase in May that gave analysts hope that the recovery might be accelerating. As a result, the three-month change in the investment grade index ending July 31 posted a slight 1% increase. The CCRSI August report is based on data through the end of July.

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