Fed official: Commercial real estate weaknesses could further strain market
MIAMI – March 5, 2009 – The decline in the housing market has been well-documented, but a high-ranking Federal Reserve official told a Miami audience on Wednesday that he has been paying more attention lately to weakness on the commercial side of the real estate market.
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, described the U.S. economy as being “very weak” but in a position to begin a modest recovery during the second half of this year.
Still, one has to be mindful of the “very real downside risk” that commercial real estate poses to that recovery, Lockhart said in a talk to the Greater Miami Chamber of Commerce.
“Problems in real estate are well known,” Lockhart said during a lunch at Jungle Island. “But with continued economic weakness, I’m increasingly paying attention to commercial real estate.”
Lockhart noted that commercial mortgage debt, which amounts to about $2.5 trillion of commercial property loans with banks and in mortgage-backed securities markets, is about one quarter the size of residential property loans, which measures about $11 trillion.
Nationally, commercial real estate accounts directly for at least 4 percent of the country’s gross domestic product.
“Declining commercial real estate markets could put further pressure on already strained financial institutions and markets,” Lockhart said. “And overcoming problems in the financial sector is central to achieving economic recovery.”
Nearly 2 million square feet of office space is currently under construction in downtown Miami. There’s an additional 500,000 square feet being built throughout the rest of the Miami-Dade County.
Meanwhile, vacancy rates for top-tier Class A and B office space were 13 percent during the fourth quarter of 2008, according to Jones Lang LaSalle. That compares to a rate of 10 percent during the same time the year before.
Lockhart also talked about weakness in the retail industry, especially in new projects or established centers where anchor tenants leave a shopping location.
Locally, new projects like Midtown Miami have recently seen two of its major tenants go under – Circuit City and Linens ‘n Things.
“When an anchor tenant leaves a shopping center, or overall occupancy falls below a threshold level, other tenants are often free to cancel their leases,” he said.
Almost all parts of the commercial real estate market – office, retail and hotel space – are suffering, Lockhart said, with the one exception being warehouse, or industrial space.
“This seems to be, perversely, at least partly because of the backup of inventories resulting from weak consumer spending and adverse retail and manufacturing conditions,” he said.
A voting member of the Fed’s policy-setting Federal Open Market Committee, Lockhart joked before his remarks that he certainly could “not turn down an invitation to a place called the Parrot Jungle,” adding one of the parrots there squawked “Bailout!” at him.
After his speech, Lockhart took questions from the audience, including Apricot Office Supply & Furniture owner Basil Bernard, who asked when small businesses could expect the credit markets to open up once again.
Lockhart answered by talking about a new joint program launched by the Fed and Treasury Department this week – the Term Asset-Backed Securities Loan Facility (TALF). On Tuesday, the Fed described the program as having the potential to generate up to $1 trillion of lending for businesses and individuals.
In remarks to reporters after the event, Lockhart said there was “no easy answer” to give small-business owners right now but again pointed to the TALF program. He said if all goes well, the program should be able, through the Small Business Administration, to open up financing for small businesses within weeks.
Copyright © 2009 The Miami Herald, Niala Boodhoo. Distributed by McClatchy-Tribune Information Services. Miami Herald business writer Matt Haggman contributed to this report.
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