Senator Dodd Calls on Federal Bank Regulators to Report Efforts to Stabilize the Commercial Real Estate Market
February 23, 2010

While the prospect of stimulus work may be promising for companies working in commercial construction, such as glazing contractors and glass fabricators, it does not change the fact that the construction industry is one that has been extremely hard hit. And though there are a number of reasons for the lack of new construction projects, increasing vacancy rates is one that has been on the forefront of recent discussions. As Ken Simonson, chief economist for the Associated General Contractors of America, notes, "We still have sharply rising vacancy rates for offices and retail space, sluggish occupancy for hotels … and that combination means none of those income-producing segments are producing enough now to make them attractive prospects for more construction." (CLICK HERE to read that full article.)

One member of Congress has taken strides to find out just what is being done to try and help this situation.

Senate Banking Committee Chairman Chris Dodd (D-CT) sent a letter to Federal bank regulators and asked that they report on their efforts to stabilize the "very troubled" commercial real estate market (CRE). Despite positive signs in the economy, Dodd noted evidence the commercial real estate market continues to struggle. This evidence, according to Dodd, includes the following:

  • Last month, the Congressional Research Service reported "delinquency rates for commercial mortgages climbed from 4 percent at the end of the third quarter of 2009 to more than 6 percent in January 2010;"
  • At a Congressional Oversight Panel hearing last month, a Federal Reserve official testified that "Federal Reserve examiners are reporting a sharp deterioration in the credit performance of [CRE] loans in banks' portfolios and loans in commercial mortgage-backed securities," and warned that more than $500 billion of CRE loans will mature each year over the next few years; and
  • This month the Congressional Oversight Panel reported "that nearly half of CRE loans at present are "underwater" and that the largest "loan losses are projected for 2011 and beyond."

Given growing concerns, agencies on the Federal Financial Institutions Examination Council released a policy statement in October on prudent commercial real estate loan workouts to "assist examiners in evaluating institutions' efforts to renew or restructure loans to creditworthy CRE borrowers."

In his letter, Chairman Dodd followed up, writing these agencies and stating, "I would like you to provide an update on how this guidance is helping to stabilize the CRE market. In addition, I would like an explanation of how [each agency] has addressed the CRE issue so far, and what additional steps you plan to take."

Chairman Dodd continues, "I believe that the weakness in the CRE market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy. I urge you to redouble your efforts to provide appropriate oversight of this vital component of our economy, and look forward to working with you to bring much needed stability to the CRE market."

However, economists say that even if there is an improvement in commercial real estate conditions it won't necessarily spur new building projects. As Simonson adds, "We do not expect demand for commercial construction loans to improve much, even if bankers loosen their lending standards, until vacancies decline and rents or room rates increase for office, retail, warehouse and hotel space."

CLICK HERE to read Senator Dodd's letter to Federal bank regulators.

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