According to a Wall Street Journal report ($) Wednesday, a Fed real-estate expert told banking regulators last month that "banks will be slow to recognize the severity of the loss - just as they were in residential."
Commercial property values are down along with rental payments, pummeling lenders. But instead of taking hits on bad loans immediately, many banks are "extending loans when they come due even if they wouldn't make those loans now," the Journal states.
"There's been an extend-and-pretend philosophy by banks to forestall hits to their balance sheets that might occur," Patrick Phillips, new chief executive of the Urban Land Institute, told the Journal.
A Journal analysis also finds that banks heavily exposed to commercial real estate are keeping less cash on hand to cover bad loans – setting aside just 38 cents in reserves for every $1 in loans during the second quarter. That's down from $1.58 in extra capital for every dollar in bad loans at the beginning of 2007.
According to the Fed presentation, commercial real-estate losses are expected to hit 45 percent next year.