For more than a year, People”™s United Financial Inc. has touted its relatively low exposure to troubled residential real estate loans, pointing out to investment analysts its steadily increasing commercial loan portfolio.
Now it is that commercial portfolio that has a few analysts a little worried.
Morgan Stanley reportedly singled out People”™s United among a group of banks with more than 15 percent of its loans backing office and retail properties, as well as New York stalwart M&T Bank and a few other noteworthy banks in the Northeast region.
The report came even as federal officials reiterated the risk of large-scale defaults on commercial real estate loans, with Federal Deposit Insurance Corp. Chairman Sheila Bair citing it is a looming problem even as other parts of the national economy lurch back into gear.
In mid-September, New York City-based Real Estate Econometrics predicted the default rate for bank-held commercial mortgages will increase from 2.8 percent in the second quarter to 4.2 percent in the fourth, and will not peak until 2011.
The largest losses will occur at regional and community banks, the firm added, principally due to higher concentrations in commercial real estate. At 28 percent, commercial real estate concentrations are greatest among banks with between $100 million and $1 billion in assets.
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Those are the sentiments, as well, for some watching Fairfield County”™s markets.
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“The general sense is that the problems in commercial real estate are just beginning,” said Jerry Berkman, a partner and commercial real estate attorney in the Stamford office of Day Pitney L.L.P.
Berkman”™s career has spanned the arc of commercial real estate development in downtown Stamford, beginning with his early work on F.D. Rich & Co.”™s construction of a swath of commercial offices in downtown Stamford.
Five of those buildings were acquired in 2006 by New York City-based RFR Holding L.L.C. as the market hit its peak. RFR says it is seeing healthy leasing activity and has continued investing in renovations and upgrades in the properties.
Still, some wonder whether companies like RFR that bought properties at the peak are getting sufficient lease pricing terms to maintain operating profits on the property, and whether they are getting by either via deep pockets or patience on the part of their lenders.
“They bought at the height; they seemingly depended on very high rents,” Berkman said. “I don”™t know if they are going to be able to get those rents in this economy. However, they may be able to weather the storm based on their other holdings.”
For its part, People”™s United does not seem worried, with CEO Philip Sherringham telling investors in a July conference call that its commercial loan portfolios have held up in the recession. The bank listed $21 million in non-performing loans among its business real estate loans outstanding; $12 million in its standard commercial and industrial loan portfolio; and $9 million in its residential mortgages. Some 80 percent of its nonperforming commercial real estate exposure, however, is the result of a single, shared national credit.
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“Our charge offs have consistently been much lower proportionately, and we feel that this is due to the fact that we have underwritten our entire commercial real estate portfolio with a primary emphasis on cash flow as opposed to collateral,” Sherringham said. “The portfolio is well diversified with limited exposure to construction.”
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Earlier this year, Nomura Research Economics reported an 11.6 percent drop in power generation construction; a 7.9 percent drop in communications-based construction and religious structure construction down 10.2 percent, calling the arenas “particularly soft.”
What”™s more, as some large competing banks pulled back during the credit crisis, People”™s United indicated it was able to register improvement in its loan pricing due to lack of competition.
“There are some very good opportunities right now particularly in commercial real estate ”“ very high-quality credits and spreads that are in many cases maybe two times what they were two or three quarters ago,” said Brian Dreyer, head of commercial banking for People”™s United. “(There are) lots of well seasoned loans coming to maturity points in other people”™s portfolios, people who would prefer to shrink because of capital considerations and we would prefer to grow.”
