Financial Update (First Quarter 2009)

Atlanta Fed President: Real Estate Recovery Critical

Atlanta Fed Chairman Dennis Lockhart

While it accounts for a smaller part of the economy than housing, commercial real estate is critical to the nation’s financial sector. And recovery of the financial sector is necessary for economic recovery, Atlanta Fed President Dennis Lockhart said during a recent speech to the Greater Miami Chamber of Commerce.

About $2.5 trillion in commercial property loans are on the balance sheets of financial institutions and in commercial mortgage-backed securities markets, compared to about $11 trillion in total residential mortgage debt. Commercial real estate includes retail, office, hotel, and industrial buildings. All those categories are facing problems, Lockhart explained.

Weakness is widespread
In the retail sector, numerous shopping centers were built near new subdivisions, and much of that retail space is empty. General weakness in the retail industry is not helping the situation. Industry data indicate that abandoned store space and store closings have reached levels not seen since the recession and real estate slump of 1991–92, Lockhart noted.

In addition, hotel occupancy rates dropped about 8 percent in the fourth quarter of 2008. After high gas prices curtailed summer tourism, many companies are reducing business travel in the weak economy.

Text of speech
Dennis Lockhart biography

With the weak economy and rising unemployment, office and industrial vacancies have been rising. “In virtually all segments of commercial real estate, there is downward pressure on property values because of new construction coming on stream—construction started before the recession fully set in—coupled with the effects of the economic downturn,” Lockhart said in south Florida, where real estate is a particularly important part of the economy.

Concerns exist down the road
He added that the National Association of Real Estate Investment Trusts estimates that about $400 billion of commercial mortgages are set to mature this year, raising concern about maturity defaults. “Commercial real estate finance challenges could further complicate efforts to stabilize the banking system and credit markets,” Lockhart said.

March 31, 2009