As Commercial Real Estate Woes Mount, More Alarms Sound

The head of the Federal Reserve Bank of Atlanta raised cautionary flags about the moribund commercial real estate market (CRE). In an address before the Urban Land Institute in Atlanta today, Dennis P. Lockhart, whose comments were highlighted in the Calculated Risk blog, expressed concern "about the potential impact of CRE on the broader economy. Unlike residential real estate, there is not the same direct linkage from CRE to household wealth — and therefore consumption — caused by erosion of home equity. However, 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."

He added that "about 40% of the CRE debt is held on commercial bank balance sheets in the form of whole loans. A lot of the CRE exposure is concentrated at smaller institutions (banks with total assets under $10 billion). These smaller banks account for only 20% of total commercial banking assets in the United States but carry almost half of total CRE loans (based on Bank Call Report data)."

Still, Lockhart said he did not expect the growing CRE crisis to have the same broad impact as the one triggered by subprime real estate loans in 2008. "While the CRE problem is very worrisome for parts of the banking industry, I don't see it posing a broad risk to the financial system. Nonetheless, CRE could be a factor that suppresses the pace of recovery. As the recovery develops, the CRE problem will be a headwind, but not a show stopper, in my view."

In a special report report on the CRE situation in its region, The Philadelphia Inquirer notes an effort to reverse the trend of converting old industrial buildings to chic offices, restaurants or apartments. Their plan: Fill the old industrial buildings with new industries, especially those developing so-called green technologies.

More from Knowledge at Wharton:

On Shaky Ground: Commercial Real Estate Faces Financial Tremors

Collateralized Damage: Commercial Mortgage Securities Are at a Standstill

Peter Linneman on Real Estate: The Storm Is Over, the Wreckage Remains