Commercial real estate is now the weakest economic sector in the country, as residential real estate is showing some positive aspects and other sectors are mixed, the Federal Reserve said in its Beige Book.

The report, published eight times a year, is based on anecdotal information from the 12 regional Federal Reserve Banks.

Conditions for commercial real estate were described as either weak or deteriorating across all of the Fed districts.

Banking also faltered in several districts, the report said, with Kansas City and San Francisco noting continued erosion in credit quality – often with more expected in the future.

One bright spot in the banking sector was lending to new homebuyers, in response to the first-time homebuyer tax credit, the Fed said.

Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report.

“Leading the more positive sector reports among districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer,” the report said.

The president of the Federal Reserve Bank of Richmond, Virginia, which compiles the beige book, said that while losses on commercial real estate are mounting for community and regional banks, this does not represent a systemic risk to the broader economy.

“This looks like a manageable problem for the banking industry,” Richmond Fed President Jeffrey Lacker told reporters. “I don’t think it threatens the banking industry as a whole. The magnitude of the deterioration seems consistent with past recessions.”

Grubb & Ellis chief economist Robert Bach also was sanguine about the overall impact of the downturn in commercial real estate.

“I don’t think it’s going to be the next shoe to drop,” Bach was quoted as saying in David Bodamer’s Traffic Court blog.

He notes that the commercial real estate problems are focused in regional banks and the FDIC has a tested method of taking over these banks on Friday and opening them on a Monday under the auspices of a bigger bank.

“These are not too big to fail banks,” Bach told Bodamer. “I don’t see [commercial real estate] as an unmitigated disaster – I see it as a repeat of what happened in the 1990s, but the economy can handle it.”

Global commercial real estate services firm Jones Lang LaSalle says that the worst of the global commercial property meltdown is over, even though the U.S. market remains more “subdued” than rebounding markets in Asia and Europe, Reuters reported from London.

Asia’s real estate market is benefiting from a quicker-than-expected economic turnaround, Jones Lang said, while Europe is also seeing stronger investor interest.

“In contrast, U.S. commercial property continues to struggle under the weight of weak corporate demand, concerns about the size of potential loan losses, and worries over the willingness of lenders to recognize asset value declines,” the property advisor said.

 

 

Darrell Delamaide http://www.dsnews.com/articles/commercial-real-estate-is-weakest-sector-but-not-systemic-risk-fed-beige-book-2009-10-23