Commercial Real Estate Weakening, Federal Survey Says

WASHINGTON — Federal regulators said Tuesday that the residential real estate market is improving in most of the nation but the slump in commercial property is worsening in some areas, suggesting that there could be more bank and thrift failures as more loans go bad.

The weakening of the commercial real estate market was detected in a survey of 500 federal bank and thrift officials charged with selling about $200 billion in assets--most of it real estate--obtained from the failures of hundreds of financial institutions in recent years.

The continuing commercial real estate slump in certain regions is likely to make the disposition of those properties more difficult and could also lead to more failures of financial institutions as more real estate loans sour.

“We have the largest inventory of real estate the world has ever seen,” said L. William Seidman, chairman of the Federal Deposit Insurance Corp., which conducted the study. “The important thing is the direction. . . . We haven’t got to the bottom of the commercial thing, but we’re close.”

At a news conference, Seidman said federal regulators are hoping to avoid future problems with real estate by developing minimum standards for construction and development loans. The new standards would prevent bankers from being reckless in real estate in the future, he said.

For its real estate survey, the agency developed an index to gauge sentiment of current conditions compared to six months ago. A grade of 50 was a neutral point--anything above indicated conditions are improving, anything below indicated markets are getting worse.

The index for residential property was upbeat at 70, while the downbeat outlook for the commercial market had an index of 47.

“Evaluations of housing markets relative to six months ago were uniformly positive,” the FDIC report said. The most optimistic views on housing came from the West and the South, with California, Arizona, Colorado, Texas and Louisiana all emphasizing improvements in residential markets.

Worsening commercial markets were reported in California, Massachusetts, New York, New Jersey and Florida, among others. Although California is considered to be declining, it is still comparatively healthy when matched against the plunging values in truly distressed markets, the FDIC report indicated.

The overall depth and intensity of the real estate recession varies with regions. “Clearly, New England has not yet bottomed out,” Seidman said. “On the West Coast, it looks like things are reasonably good, particularly in residential” properties. “The Midwest has been strong and continues to be strong.”

The survey will give regulators a guide to help set prices when they try to dispose of real estate held by the government, Seidman noted. And it will give bankers a broad view of markets when they ponder making real estate loans, he said.

The FDIC chairman said that if he had a single wish to repair the ailing banking system, it would be to ensure that “every construction loan and development loan would be a sound loan. If that were true, we wouldn’t have a problem. We would be coasting along.”

Under the new standards being developed by regulators, bankers would no longer have such widespread discretion on making loans. The rules would dictate an acceptable minimum for the amount of money a builder would personally put into a real estate project and the number of tenants who would have to be committed to the building in advance. The rules would also impose strict limits on the concentration of real estate loans at a bank.

Regulators are discussing the rules with bankers, builders and Realtors. Everyone should “operate off the same music sheet,” Seidman said.

A combination of nervous bankers, burned by bad loans in the past, and extra-vigilant regulators, eager to compensate for perceptions that they were once too easygoing, have produced a credit crunch, the FDIC chairman said.

“There is no end of people saying credit is not available on terms they would like,” Seidman said. But many of these borrowers shouldn’t have gotten loans because their real estate projects are too risky, he insisted. “Some people are being cut off from bad habits.”

Real estate lending has suffered, but small businesses also have a hard time getting money, although these enterprises did not contribute significantly to the banks’ problems, Seidman noted.

“I don’t think the credit crunch is over, but the worst has been seen,” he said.

Seidman said the Resolution Trust Corp., which holds the massive inventory of properties from defunct savings and loans, will accelerate its sales efforts, trying to group together large groups of properties for rapid sale. The agency will also try to complete the sale this year of all the single-family homes priced under $100,000.

REAL ESTATE REPORT CARD The Federal Deposit Insurance Corp. surveyed 500 examiners and liquidators for bank and thrift regulatory agencies, asking them about the status of the residential and commercial real estate markets. Here is a rundown of the situation in states where government agencies have large real estate holdings.

Improving Markets

Commercial Residential Arizona Arizona Colorado California Indiana Colorado Louisiana Florida Missouri Georgia Oklahoma Illinois Pennsylvania Kansas Texas Louisiana Wisconsin Minnesota Missouri New York New Jersey Ohio Oklahoma Pennsylvania Texas Wisconsin

Worsening Markets

Commercial Residential California Massachusetts Florida Indiana Georgia Illinois Kansas Massachusetts Minnesota New Jersey New York Ohio