Commercial Real Estate Frontline

The final quarter of 2008 saw a 27 % increase in troubled real estate assets for lenders headquartered in Massachusetts according to data compiled from the FDIC. Only lenders headquartered in Massachusetts with balances of REO or Non-accrual totaling $1Million or more were included in the survey.

REO (also OREO or Other Real Estate Owned) balances moved ahead in the residential and construction note columns while multifamily and commercial (non-residential) REO balances stayed the same or decreased. REO is real estate that a bank has acquired through a foreclosure. According to FDIC data REO balances for these institutions increased by 22% to $136,882,000 from the third to the fourth quarter of 2008.

Non-Accrual refers to non-performing loan on which interest is overdue and full collection of principal is uncertain. According to typical banking regulations, if interest has not been paid for 90 days the loan is put on a cash basis. Thus, its interest cannot be credited to the bank’s revenue account until it has actually been received. Non-accrual balances with the abovementioned lenders surged 28% for the same time period to $539,981,000. The most troubling notes currently in non-accrual are residential and construction notes. Multifamily balances remain very low.

Troubled non-residential (commercial) properties in either non-accrual or REO status amounted to 21% of the total $676,863,000 in troubled real estate loans with 84.6% of that balance currently in non-accrual which means we’re very likely to see a number of commercial foreclosures and or REO sales this year.

Residential and construction notes comprise 74% of the total at just over $1/2Billion ($502,048,000). Assuming that most of the construction debt is in fact residential property “For Sale” property this spells more trouble for home and condo values and a persistent inventory overhang.

Its important to note that these balances are ONLY for lenders with headquarters in Massachusetts that are currently showing more than $1Million in non-accrual or REO. These figrues then are by no means representative of the whole of bad real estate debt in Massachusetts.
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