Economic Update – Commercial RE on the Edge?

The idea that commercial real estate might be the next big thing to implode–which is all too familiar within the commercial real estate industry–is finally getting some mainstream attention. On Saturday, speaking at a conference at Vanderbilt University, Atlanta Federal Reserve Bank president Dennis Lockhart said that “on our watch list this year, as a risk to the (U.S. economic) outlook, is continuing worsening in the commercial real estate sector.”Earlier last week, Lockhart waxed a bit more optimistic by asserting that the economy might experience “slow and tentative growth” as early as the third quarter of this year. On the other hand, Lockhart’s colleague as a regional bank president, San Francisco Fed president Janet Yellen, said last week that “it’s still impossible to know how deep the contraction will ultimately be.” Take your pick.Whatever else commercial real estate will be in the near- to medium term, it certainly won’t see the investment volume of recent years, not only in the United States but almost everywhere in the world. According to Real Capital Analytics, about 1,000 buildings valued at $47 billion traded hands worldwide in the first quarter of 2009, a small fraction–about 16 percent–of the volume during the same period in 2007. Also during 1Q09, roughly $55 billion of commercial real estate assets defaulted on their mortgages, said New York-based RCA. About $153 billion worth of assets are currently in distress worldwide, up 56 percent from 4Q09. No property type has been spared the growth of mortgage defaults, nor has any part of the developed world. RCA also noted that some $36 billion in commercial real estate debt had been restructured by the end of the first quarter, as creditors extend loans rather than foreclose on them. Or, as RCA puts it, the banks are “kicking the can down the street.” When Fortune magazine published its 2009 Fortune 500 list over the weekend, Wal-Mart Stores Inc. came out only as number two public company by revenue, despite its 7 percent revenue increase during 2008 when compared with 2007, to $405.6 billion (with $13.4 billion in profit, up 5 percent). Oil giant Exxon Mobil, with $442.8 billion in revenue in 2008, knocked Wal-Mart out of the number-one spot, where the retail behemoth had dwelled for six out of the last seven years. Still, Wal-Mart’s performance, buoyed by recession-shocked consumers looking for Always Low Prices, Always, is nevertheless impressive. If Wal-Mart were a nation with a gross domestic product instead of revenue, it would be the 23rd largest economy in the world, just behind Poland but ahead of Norway, according to International Monetary Fund estimates. On Friday, Wall Street ended its fifth upward-moving week with some modest gains. The Dow Jones Industrial Average was up 5.9 points, or 0.07 percent, while the S&P 500 gained 0.5 percent and the Nasdaq moved upward 0.16 percent.