Delivering good news for bank asset values and loan demand, the Federal Deposit Insurance Corp. reported Tuesday that commercial real estate markets performed better this fall than at any time in the last two years.
However, because improvement in the residential property market was less robust, the overall market index has remained essentially unchanged since July.
FDIC Chairman Ricki Helfer said banks are likely to see continued progress in commercial markets.
"The increasingly positive reports of commercial real estate market conditions during 1996 suggest that the recovery in this sector is gaining momentum," she said.
The improving commercial real estate market helps banks in two ways: by increasing the value of troubled assets and by spurring demand for new loans, according to James L. Freund, the FDIC researcher who conducted the study.
"The assets they are stuck with become easier to deal with," he explained. "In terms of new business, it opens up opportunities for making loans."
The FDIC surveys real estate conditions each quarter by interviewing examiners and liquidators from all the banking agencies. On a scale of 0 to 100, values above 50 indicate that a majority of the 310 regulators believed conditions were improving.
The FDIC's latest survey - covering August to October -yielded a score of 72 for commercial real estate conditions, up four points from July and up seven from October 1995. Conditions were most robust in the West, where the commercial index soared 11 to 83. The next closest region was the South, with a score of 73.
The FDIC's overall index, which combines commercial and residential markets, stood at 67 in October, down one from July but up three points from October 1995.
The residential index dropped six points in the period to 63 but was flat compared to October 1995. The Midwest reported the biggest decline, down nine points from July to 53.
Reports of improvements in the residential sector still outweighed reports of declines by a 3-to-1 margin, according to the survey. Increasing sales prices were reported in almost 40% of the markets.
In the key office building category, 31% of those surveyed reported continued improvement. Also, only 29% of the participants reported excess supply of floor space in their markets, the lowest figure since the survey began in 1991.
All regions of the country reported positive market conditions during October.
Even when residential markets were taken into consideration, the West bested the other regions with an overall score of 78, which was flat from July. The South was second with a composite index of 69, down one from July.
The Northeast turned in an overall index of 66, up three from July and its highest reading in two years. The Midwest came in fourth with a composite score of 59, down six from July.