Banks continued to report further erosion in commercial real estate-related credit quality and weak or declining loan demand in their quarterly earnings reports to investors and monthly lending reports to the Federal Reserve Bank. Rising loan payment delinquencies, declining property values, rising vacancies, the lack of deals and consumer spending were often noted as the primary drivers of credit-quality deterioration. In addition, the quality of loan applicants and lack of confidence on the part of borrowers in their own assets were also said to be deteriorating.
So why aren't banks seemingly more worried? The answer from many of them is because this isn't residential real estate. If a homebuilder or homebuyer gets in trouble, the loan ends up in trouble because there is no cash flow to support the deal. That's not the case with commercial real estate, according to banks.