Moody’s Sees More California Loan Problems : Banking: The rating agency says a softening market will hurt the state’s commercial real estate lenders, but it does not see a New England-style recession here.
Loan problems for commercial real estate lenders in California will probably increase later this year because of the state’s softening market for office buildings, shopping centers, hotels and industrial buildings, a key New York debt-rating agency said Thursday.
But Moody’s Investors Service, in a report called “Spotlight on California Real Estate,” also said it does not see a New England-style real estate recession for California. Moody’s added that any “adjustment” the market faces should be temporary and unlikely to cause major problems for the state’s largest banks, which it generally credited with prudent underwriting standards.
Still, the report is likely to fuel the ongoing debate over the strength of the California real estate market, and whether more borrowers will fail to make payments on their loans.
Moody’s did not speculate on the size of losses and other problems that lenders may face, but said the commercial real estate market in California “appears to be generally overbuilt,” with San Diego, Orange County and the Silicon Valley the most vulnerable because their economies depend so much on high technology and defense.
The report also said that the “absorption” rate--the net gain or loss in leasing empty offices--could slow considerably. It also said that even though the state’s four largest banks--BankAmerica, Security Pacific, Wells Fargo and First Interstate--have good underwriting standards, all are likely to experience some problems.
One in five of the nation’s offices are vacant nationwide, which many real estate experts consider a disturbingly high proportion. Vacancy rates for most California metropolitan areas are in the same 15% to 22% range, which Moody’s said was especially troublesome because the absorption rate is slowing.
To date, major California lenders generally have yet to suffer big losses on commercial real estate loans within the state. The state’s largest bank, BankAmerica Corp., is considered especially insulated because it was largely out of the market through most of the late 1980s while its executives were busy turning the company around.
Instead, most real estate problems for lenders so far have been with out-of-state loans. For example, Coast Savings Financial, parent of Coast Federal Bank, disclosed on Thursday a $28.7-million quarterly loss caused mainly by problems with loans used to finance apartment and office buildings in Colorado, Texas and New England.
The rating agencies have periodically downgraded debt issued by California institutions, citing their vulnerability to a potential real estate recession. As a result, the agencies have come under fire from critics, who argue they are overreacting because they took too long to spot real estate problems last year in New England.
Lenders have tried to downplay any pessimistic reports about the state’s real estate market, arguing that the California economy is still strong and diverse relative to the rest of the nation. Only recently have they acknowledged that the state’s commercial real estate market is showing problems.
Chester V. Murray, associate director of financial institutions for Moody’s, said that the agency has been less harsh in its ratings of California institutions than of banks in much of the East. He noted that even though Moody’s recently lowered its ratings for Wells Fargo and Security Pacific, both still rank among the nation’s top-rated banks.
“We have taken a moderate stand in California because we have a moderate view of the problems,” Murray said.
Moody’s has a dimmer view of thrifts, which Murray said may be more exposed to problems because they have a smaller financial cushion than banks.
In the report, Moody’s says that residential real estate loans should not be a major problem for larger banks, but may be for thrifts and smaller banks with looser underwriting standards.
