Stress Tests to Reveal Commercial Real Estate Losses

Although Federal Reserve Chairman Benjamin Bernanke was out in front of new cameras today declaring the severe recession impacting the U.S. will ease by the end of this year (it will? seriously?), a May 5th Reuters news release noted that losses of up to 12% on commercial real estate loans over the last two years are expected to be revealed at major  banks undergoing recent government ’stress tests.’ Regulators expect to cite these commercial real estate losses as the main reason that some of the largest banks in the world now need even more capital.

What’s strange though is how much isn’t being said about the state of U.S. banks and how many facts and figures don’t add up. This Thursday, partial results of the stress tests are set to be released by Treasury. The DJIA fell slightly today anticipating those results. A initial plan to announce partial results of the tests Monday was pushed back to this Thursday to give the banks time to state their case to Treasury before their losses are publicly exposed, making it harder (they say) to raise additional capital.

Since the U.S. economy contracted more than 4% over the last quarter alone, it’s hard to imagine where a third or fourth quarter recovery is going to come from, especially if the stress tests reveal substantial commercial real estate losses. Cars aren’t selling. Retail is down. Commercial loans are not being renewed. Many corporations are going bankrupt. Foreclosures are still rising. Home sales are still falling. The unemployment rate is still climbing fast.

But recovery is right around the corner.

Anyone interested in investing in U.S. real estate can be forgiven for feeling a bit confused by all these disparate facts and opinions, and the general murkiness surrounding the recent pronouncements of the Fed and the Treasury Department.

One encouraging sign however is that in the markets hit hardest and first by the popping of the real estate bubble, housing sales do seem to finally be trending upward. Nevada, Arizona, Florida, and California have seen prices fall by more than half in many areas, and now, with government rebates available to first time buyers and mortgage rates at historic lows, bargain hunters are finally starting to fork over some cash.

So, if you want to get in on any of these depressed markets, you might want to get in now.

As for the real estate in rest of the country, especially the industrial midwest and the east coast, ‘wait and see’ still applies. Advance at your own risk. Bargain aggressively.  Think twice, and then think again.