DJ Comml Real Estate Market To Impact Banks For Several Qtrs
. By Jessica Papini Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--As Goldman Sachs Group Inc. (GS) revealed in its second-quarter earnings, trouble in the commercial real estate market will continue to pester banks.
"This is the lingering-write-down asset class," said Roger Freeman, analyst at Barclays Capital, who thinks this will be an ongoing challenge for banks for at least another year: "There is a fair amount of pain to be had across the industry."
While Goldman Sachs reported a blowout second quarter, it did stub its toe on $700 million of fair value losses associated with commercial real estate mortgage loans within the fixed income, currencies and commodities group.
Additionally, Goldman Sachs had $500 million of losses in principal commercial real estate, in which Goldman Sachs likely had equity investments that declined in value, according to Freeman's note Tuesday. The analyst said he was guided to the loss by the company.
Analysts expected the commercial real estate market to turn sour following the decline of the residential mortgage market. Many commercial real estate loans are expected to default, and property values will fall as well. The commercial mortgage real estate market has caused losses at banks for several quarters now.
As of the end of the quarter, Goldman had $6.4 billion of commercial real estate loans that are "marked really in the low 50s," meaning reduced by almost half their original valuation, said David Viniar, Goldman's CFO Tuesday on the conference call.
Goldman Sachs is not alone among its commercial real estate write downs. Morgan Stanley (MS), which reports earnings next Wednesday, will experience commercial real estate write downs in the second quarter as well, said Keefe, Bruyette & Woods analyst Robert Lee.
To put it in perspective, the commercial real estate market is not expected to be as damaging a problem as the residential market has been to many financial institutions. Residential mortgage-backed securities continue to be downgraded, and Tuesday Moody's Investors Service downgraded its ratings on $484.7 million in jumbo residential mortgage-backed securities.
Freeman said, "The commercial market will be more protracted, but not as concentrated as the residential market."
-By Jessica Papini, Dow Jones Newswires; 212-416-2172; firstname.lastname@example.org
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