Fitch Ratings announced Tuesday that it has expanded its review of the banking sector's commercial real estate exposure as the sector's deterioration continues at "an unprecedented pace."
Though residential realty appears to be stabilizing, defaults on commercial real estate are rising, and vacancies are widespread.
As part of the expanded analysis, Fitch sent questionnaires to more than 75 Fitch-rated U.S. bank and thrift companies and requested additional information to determine the companies' exposure to commercial real estate.
The ratings agency said that commercial real estate loans, excluding construction and development portfolios, are more than one-quarter above the total equity for the 20 largest banks rated by Fitch.
The risk was even higher for banking companies with less than $20 billion of assets; their exposures more than doubled total equity.
Commercial mortgage-backed security loan delinquencies surpassed 3% in July and are expected to grow more than 60% by yearend.
Fitch said the same factors pressing on commercial mortgage-backed security transactions are increasing pressure on the performance of commercial real estate portfolios.
It has a negative outlook on nearly half of the 20 largest U.S. banking companies and thrift institutions it rates.
"While the relative size of the commercial real estate portfolio is smaller for some of the very large banks Fitch rates, the recent performance trends, expectations for continued economic weakness and the uncertain availability of the commercial mortgage-backed security market increases the concern regarding commercial real estate exposure and makes it a likely rating driver as we look out over the next few quarters," said James Moss, managing director of Fitch's North America financial institutions group.