The risks in commercial real estate loans and securities have “been reduced” and are not expected to threaten the overall health of the financial system, the U.S. Federal Reserve says.

It appears that worst-case scenarios are becoming increasingly unlikely, Patrick M. Parkinson, director of the central bank's division of banking supervision and regulation, testified at a hearing of the Congressional Oversight Panel.

Experts have feared the commercial real estate market would severely damper the economy due to a surge in foreclosures in commercial property the past two years. According to Foresight Analytics, commercial property values have fallen by 42 percent since its peak in 2007.

What’s more, about $350 billion in commercial real estate debt is expected to mature every year through 2013.

But the commercial market is beginning to stabilize. Vacancy rates among office, industrial, and retail properties have stopped rising. Rental rates continue to fall but at a much slower pace. Plus, sales of commercial properties last year were nearly double 2009 levels.

In some markets, commercial-property values have even increased by more than 30 percent from their lows in 2009. For example, last week the Mortgage Bankers’ Association’s former Washington headquarters sold for $101 million, after MBA had sold the building for $41.3 million the year prior.

Experts say that investors are bidding up property values and taking advantage of low interest rates.

Source: “Fed Official: Commercial Real Estate Risks ‘Reduced,’” Dow Jones Business News (Feb. 4, 2011) and “The Outlook: Commercial Real Estate Coming Back, But Unevenly,” The Wall Street Journal (Feb. 7, 2011)