Weakening Commercial Real Estate Market A Growing Concern
Officials at the Federal Reserve gave testimony today before Congress over the current state of the commercial real estate(CRE) market. Although it hasn’t faced a meltdown like the residential market, prices have continued to fall over the past year and a half.
Financial market dislocations and the continuing economic downturn are clearly challenging CRE markets. The pace of property sales has slowed dramatically since peaking in 2007, from quarterly sales of roughly $195 billion to about $20 billion in the first quarter of 2009. Demand for commercial property is sensitive to trends in the labor market, and, as job losses have accelerated, tenant demand for space has declined and vacancy rates have increased.
Demand for office space fell for the sixth straight quarter and with the employment picture expected to worsen through the end of the year, that trend will likely continue as well. It’s really no surprise, the country is at it’s highest unemployment level in nearly three decades
There are growing concerns at the Fed about what effect the weakening market will have on the loan portfolios of many large banks, many of whom are still struggling to meet capital requirements and maintaining effective liquidity levels. The recent Supervisory Capital Assessment Process, highlighted the riskiest CRE loans in the nation’s 19 largest banks and government has increased their supervisory efforts in response.
Financial markets remain fragile and a number of institutions already face liquidity difficulties. Some real estate analysts have predicted it may take at least two years for both commercial and residential prices to start rising again and the banking system will likely face danger over a similar timeframe.
