CRE exposure factors in stress test
A stress test conducted by Trepp L.L.C. on more than 6,000 U.S. banks found one in eight would have failed under severe economic conditions, with projected losses from commercial real estate exposure among the primary culprits.
Nearly 13 percent of the 6,151 banks included in the Trepp Capital Adequacy Stress Test would have failed “under a severely adverse economic scenario without additional capital,” according to a report this month by Trepp, a commercial real estate and securities analytics firm based in New York City.
For the 784 banks that failed the stress test, a combined $26.7 billion in additional capital ”“ which amounts to 30.9 percent of those banks”™ current Tier 1 capital ”“ would have been needed in order for each to achieve a passing level.
Tier 1 capital represents banks”™ core source for capital and primarily consists of common stock and disclosed reserves.
Based on the results of the stress test, the 784 institutions projected to fail would amass $25.1 billion in loan losses between the third quarter of 2013 and the third quarter of 2014.
Nearly 40 percent, or $9.8 billion, of those projected loan losses are concentrated in commercial real estate, according to the report.
“This served as an extension of the observations that have been made about the industry over the last four years,” the report stated. “The primary source of distress for most of the 460 banks that have been closed since the beginning of the credit crisis was overexposure to commercial real estate.”
William V. Cuddy Jr., executive vice president of CBRE Inc.”™s Stamford office, said the commercial real estate market in Westchester County has not been immune from the effects of the financial crisis, but said the system for turning over distressed properties is working.
Cuddy said there has been a post-recession increase in distressed commercial properties and underwater loans both in Westchester and nationally, which he attributed to aggressive underwriting of loans when markets were surging prior to 2007, and to rent and occupancy growth projections that became untenable amidst the economic downturn.
Cuddy, who also serves as chairman of the Westchester County Association”™s Blueprint for Westchester initiative, cited the recent sales of 104 Corporate Park Drive in Harrison and of 120 Bloomingdale Road in White Plains as examples of non-performing loans that were acquired by lenders and special servicers and subsequently turned around and recycled back onto the market.
“The market is designed for this,” Cuddy said. “We”™re seeing this stuff all the time. Is it any more frequently here than in other markets? No, but we are seeing it.”