Atlanta Fed President: Commercial Real Estate a Concern for Community Banks, Small Business

Atlanta Fed President: CRE a Concern for Community Banks, Small Business

photo of Dennis LockhartWhile there is good news in today's economy, significant challenges remain including the condition of the commercial real estate (CRE) market, Federal Reserve Bank of Atlanta President Dennis Lockhart said during a speech in Atlanta earlier this month.

Recovery under way, but…
On the plus side, he noted that he believes the economy is recovering, that some financial markets have stabilized, and that home prices have begun to rise in some markets.
By contrast, among the "sobering aspects of the economic picture" that Lockhart mentioned, government programs that have supported and stimulated the economy are at various stages of winding down or being extended.

Turning to CRE, Lockhart said falling property values and the difficulty that declining values cause real estate borrowers in repaying loans could be a problem for smaller banks.

Small businesses could feel impact
"I'm particularly concerned about the interaction among bank lending, small business employment and CRE values," Lockhart said. CRE issues could constrain lending, especially at small banks where the exposure to CRE is more concentrated. "There could be an impact resulting from small banks' impaired ability to support the small business sector—a sector I expect will be critically important to job creation," Lockhart said.

He explained that problems in commercial real estate should not damage household wealth, and thus consumption, to the degree that housing market troubles have. At the end of June 2009 there was about $3.5 trillion of debt outstanding associated with CRE, compared to about $11 trillion of residential debt. He added that while CRE market turbulence is serious for parts of the banking industry, he does not believe that it poses a broad risk to the financial system.

"Nonetheless, CRE could be a factor that suppresses the pace of recovery," Lockhart said. "As the recovery develops, the CRE problem will be a headwind, but not a show stopper, in my view."

November 25, 2009