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Dire Predictions on CRE Loans

Losses in commercial real estate excluding construction are expected to increase 10-fold, Deutsche Bank AG analyst Mike Mayo said in a Jan. 5 research note. Moody's Investors Service said yesterday it's considering a downgrade of Synovus because of commercial real-estate losses.

Borrowers have fallen behind on payments to regional lenders as the year-old recession shutters retail stores and offices. Overdue commercial real-estate loans quadrupled from two years earlier in the third quarter to 4.73 percent, according to seasonally adjusted data from the Federal Reserve. That's the highest level since 1994.

“We're overbuilt in a lot of areas like shopping malls,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. Apartment developments are also suffering as falling home prices draw people away, he said. “The fundamentals are on the verge of going really, really negative for commercial,” McCain said.

Losses are likely to get worse because overdue commercial construction loans, an early indicator of future defaults, are rising, according to Mayo. Developers may not be able to refinance “hundreds of billions of dollars” in loans because there aren't any willing lenders, said Sandler O'Neill and Partners LP analysts led by Mark Fitzgibbon in a Jan. 5 note.

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