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A new report from Moody’s Investors Service is raising concerns over commercial real estate lending, since it shows banks becoming as overextended on commercial real estate properties as they were during the 2007 financial crisis. By calculating the market wide loan-to-value ratio—adjusted for normalized, historical rates of returns—Moody’s found the ratio has exceeded 100% for two years.
Moreover, it reached 118% in the last quarter, higher than the 2007 peak and tipping point before the crash. Credit indicators and construction lending also continued to improve last quarter, reaching levels better than before the crisis.
Moody’s analyst Joseph Pucella says banks aren’t falling apart yet but adds results can be a “warning sign.” New buffers to prevent crises should make a similar crash unlikely, Joseph says, but banks still need to be paying attention, since commercial real estate overleveraging, sharp loan growth and ever-climbing loan-to-value ratio need to be monitored so assets don't deteriorate quickly, as they did before.
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