Economic Update — Fed Worried About Commercial Real Estate

“Stay alive till ’95” was a mantra for beleaguered commercial real estate interests back in the early ’90s, when various noxious economic ingredients made an ill stew for the industry. What’s a good mantra for today? Hard to say, since the noxious ingredients are a little different this time, and there’s also some feeling in the industry that the other shoe has yet to drop. The Federal Reserve’s Beige Book, which was released Wednesday, attested to the uncertainty. The report from the Sixth District (headquartered in Atlanta), for instance, noted that “commercial real estate reports were decidedly more negative than previously reported. Vacancy rates continued to rise in many parts of the District and this was putting downward pressure on rents, most notably in the retail sector.” In other words, keep battening down those hatches–as if anyone needed to be told that. “Going forward, commercial real estate contacts anticipate that more space will become vacant in coming months and that construction will slow significantly,” the Beige Book predicted. The good news, such as it is, might lie in the fact that however much construction might further slow down in 2009 and beyond, in most of the country commercial construction never went quite as gangbusters in the early- to mid-2000s as it did in the late 1980s. That circumstance left many U.S. markets with severe overbuilding when the recession of the early ’90s came. “Confidence is lacking now, but it’ll be back eventually,” Sheldon Gross, president & CEO of West Orange, N.J.-based Sheldon Gross Realty Inc. told CPN, speaking in particular about the office market in New Jersey. “And when it does, the good thing is that there won’t be a gigantic amount of space to be filled.”But it will be a while till confidence returns. ADP–whose figures often don’t quite jibe with the federal government’s–said on Wednesday that the nation lost 697,000 private-sector jobs in February. Another report by Challenger, Gray & Christmas offered the consolation that planned layoffs at U.S. companies were down 23 percent in February compared with the month before. The federal government’s report on nonfarm payrolls for February will be out on Friday. The correct name of the Obama administration’s program to stanch foreclosures is “Making Home Affordable” (Home not Homes), which doesn’t quite have the acronym value of TARP or TALF. It contains two thrusts: loan modifications and loan refinancing. Cash incentives to lenders and other parties are at the heart of the program, which contrasts with mostly incentive-free FHA Hope for Homeowners program introduced late last year, and which was about as successful as the Susan B. Anthony dollar. “Making Home Affordable” also contained a few surprises, such as a relatively high ceiling on mortgages that might qualify for help: $729,750. After a week of stumbling downward, the equity markets stumbled upward on Wednesday–supposedly because the Chinese government is preparing for more stimulation of that nation’s economy, or maybe the price of oil. In any case, the Dow Jones Industrial Average was up nearly 150 points, or 2.23 percent. The S&P 500 was likewise up 2.38 percent, and the Nasdaq gained 2.48 percent.