A Small Problem?

The devastating consequences created by the residential mortgage market’s blow-up have been well documented. Now concerns over the broader impact of souring commercial real estate (CRE) loans are on the rise. The value of CRE loans outstanding is significantly smaller than residential loans ($3.5 trillion vs. $11.1 trillion); however, the size of the potential losses is not as much of a problem as it is the size of the institutions that hold these loans.

Smaller regional and community banks (<$10 billion in assets) account for less than 20% of all commercial banking assets in the U.S., but hold more than half of all outstanding CRE loans. Guess which institutions are more likely to lend to small businesses? The answer – small banks. Worse yet, those banks that account for almost half of all small business lending have the highest exposure to CRE loans. Mounting losses for banks from bad CRE debt will likely precipitate yet another impairment to credit availability for small businesses. Since businesses with fewer than 50 employees typically account for about one-third of total net job growth during economic expansions, credit constraints will likely prevent small business owners from ramping up hiring activity once the economic recovery gains momentum.