Economic Update - Green Shoots a Little Greener, but CRE Not Overjoyed

Economic Update - Green Shoots a Little Greener, but CRE Not Overjoyed
Jul 21, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

It was a good way to start the week, economically speaking. According to the Conference Board, the U.S. index of leading economic indicators rose 0.7 percent in June, marking the third rise in the index in as many months. In the first half of 2009, the index improved at an annualized rate of some 4.1 percent , a clear contrast to the way it shrank in the last half of 2008 at an annualized rate of 6.2 percent.

The latest survey from the National Association for Business Economics, also released Monday, posited that the U.S. economy is stabilizing, with nearly half of the more than 100 respondents--who are business economists--saying that the worst is over. Most believe the bottom will be in the second half of 2009, and that the U.S. gross domestic product will rise a tepid 1.2 percent in the second half. Which is better than contracting, anyway.

In a development that gives retailers a bit of a breather, CIT Group Inc. seemed to be on the verge of avoiding bankruptcy (for now) through a $3 billion bridge loan from some of its largest bondholders, according to Reuters, citing unnamed sources. The collapse of CIT, which forms an important source of short-term capital to many manufacturers who supply apparel retailers, would probably have damaged retail even further than its already sorry state.

Even Iceland seems to be on the mend a bit. The government of the island nation, infamous for how completely its financial system melted down last fall, has struck a deal to recapitalize the country's three largest banks, which were seized by the government in late 2008. The $2.1 billion repair of the banking system is an important step toward the disbursal to Iceland of monies from the International Monetary Fund, among other international lenders.

The U.S. economic green shoots aren't expected to affect U.S. employment, a noted lagging indicator, for some quarters to come. Likewise commercial real estate didn't have quite so much to cheer about on Monday.

According to Moody's Investor Service, commercial real estate prices fell 7.6 percent in May. From this time last year, office properties were down 29 percent in pricing, while industrial properties lost 12 percent in valuation.

Even more ominously, according to an analysis by the Wall Street Journal, banks are writing down commercial real estate loans at such a rapid clip that losses on loans tied to such properties could total $30 billion by the end of 2009. The newspaper based that estimate on date gleaned from 1Q09 financial reports published by more than 8,000 banks.

The biggest banks don't stand to be the biggest losers, however, the WSJ predicted. Regional banks, which have proportionally more exposure to commercial real estate loan losses, do.

Wall Street didn't seem to care much about problems in commercial real estate on Monday, with the Dow Jones Industrial Average gaining 104.21 points, or 1.19 percent. The S&P 500 was up 1.14 percent and the Nasdaq gained 1.2 percent. The S&P 500 plans to dump CIT and add Red Hat Inc., a software company.