Declining commercial real estate markets pose a risk to financial institutions and markets, Federal Reserve Bank of Atlanta President Dennis Lockhart warned on Wednesday.

"Given eroding demand for commercial space, financing pressures in commercial real estate are cause for concern," Lockhart said during a speech in Miami.

Lockhart, a voting member of the Federal Open Market Committee, said challenges faced by the sector could further complicate efforts to stabilize the banking system and credit markets. He noted there is currently about $2.5 trillion worth of commercial property loans on the balance sheets of financial institutions and in commercial mortgage-backed securities markets.

"Banks that financed the construction of commercial properties may end up keeping those loans if the properties cannot achieve the cash flow needed to service new permanent debt," she said.

On the economy as a whole, Lockhart said recent data has been "discouraging" and that there is little reason to be upbeat about the immediate future.

However, the Fed president said he has noticed signs of improvement in strained credit markets, "particularly where policy-makers have provided support," and as such sees reason to expect a modest economic recovery in the second half of the year.

By Stephen Huebl and edited by Sarah Sussman
©CEP News Ltd. 2009