The fallout from the financial meltdown has taken its toll on office space. As the recession took hold, companies laid off more and more employees. It stands to reason that all that office space isn't needed. Reis Inc. tracks office space. Reis reported that 1.8 million square feet of office space were lost in the recent quarter, with a vacancy rate of 17.4%.

Office space is tied to employment. The recent numbers indicate that employers are still not planning to hire additional employees who, in turn, would occupy more space. Some agencies of the federal government have expanded but this has been countered by a cutback from banks and larger corporations.

Friday marked the failure of another bank, pushing the 2010 total to 42. The Federal Deposit Insurance Corporation took over Beach First National Bank in Myrtle Beach, South Carolina.

The bank had $585.1 million in assets and $516 in deposits. Bank of North Carolina, based in Thomasville, is taking over the failed bank's assets and deposits. The Beach First failure is expected to cost the FDIC $130.3 million.

A growing number of loan defaults, especially in the commercial real estate sector, have put considerable pressure on banks across the country. In fact, failures are expected to peak this year, exceeding the 140 that occurred in 2009, which was the worst year since 1992.

The commercial real estate sector is rumbling as General Growth Properties (GGP) attempts to exit from bankruptcy. Several big names have weighed into the fray, including Simon Property Group (SPG) and Canadian firm, Brookfield Asset Management (BAM). At present, General Growth has made an overture at splitting itself into two separate companies.

The FDIC said this week that it expects distressed loans tied to mortgages and commercial real estate failures to result in many more bank failures this year. Last year 140 U.S. banks failed, the highest annual level since 1992. The FDIC has said the total bill for bank failures for the period of 2009 through 2013 could reach $100 billion.

Five more banks were seized by regulators on Friday, bringing this year's total to nine. The five failed banks are:

A decline in revenues is forcing hotels into foreclosure. The aggressive deals being used to lure guests onto a property is helping to bring in some revenue, but it may not be enough. Occupancy is down 10%, which has sent hotel mortgages into delinquency faster than the rest of the commercial real estate industry.

And it could get worse next year. An oversupply of guestrooms could keep room rates low, making 2010 a high-risk year for hotel foreclosures. Demand should gain 1.6%, according to hotel research firm STR Global, but average room rates are likely to fall 3.4%. The result would be the greatest spread between demand and rates in the 20 years STR Global has been collecting data.

Investment-grade commercial real estate prices gained 4.4% in the third quarter of this year. But, it's hard to tell if -- like brief blips of hope we've seen in consumer spending, unemployment and even luxury meals in London -- this is a change in the market or just a tease.

This increase in the MIT Center for Real Estate's transaction-based index (TBI) is the first up-tick in more than a year and the biggest gain since the middle of 2007. One quarter doesn't make a trend, cautions David Geltner, director of research at the MIT Center for Real Estate, but he says, "this is the strongest sign of a bottom that we've had in two years." The TBI reached 36.5% below its 2007 peak last quarter, up from 39% from the high-water mark in mid-2007.

Loopnet (NASDAQ: LOOP) operates an online marketplace to allow for the purchase of commercial real estate. Of course, the industry has been in a slump for the past two years. That is, transaction volumes are low, credit markets are still frozen, vacancy rates continue to rise and asset prices remain on the down trend.

Yes, it's hard to find any silver lining.

Remember the havoc in the financial markets when the residential bubble burst last year? Are we in for a rerun this year or next year?

You are probably thinking that such an event could not occur. Well think again. There is a report that says that we may be in for another crisis.

The report was initiated by Federal Reserve analyst, K.C. Conway. Conway is a senior real estate analyst at the Federal Reserve Bank of Atlanta. The Federal Reserve has acknowledged the report but said that it is not part of its formal opinion. What does the report say?

This is not an abstraction: buildings large and small are showing gaping vacancies. Storefronts are empty. Entire buildings sit waiting to be occupied. In Manhattan, retail vacancies have reached their highest rates since 2001. For the second quarter of this year, vacancies hit the absurd height of 12.4%, thanks to unemployment trends that won't quit and consumers reluctant to pry open their wallets.

Retailers are being hit just like the residential market.

After a nifty rebound off a 52-week low of $5.73, industrial and financial services giant General Electric (NYSE: GE) is in a weird place. The company's shares are trading at around $11.75, which is well below the $15 levels achieved in early May. This would seem odd as GE appears to be well positioned for the Green Shoots Scenario. The company has a big presence in alternative energy, health care solutions, and industrial products -- all big beneficiaries of both the Obama stimulus package and a nascent economic rebound.

So why does the market seem to be scared of GE? A couple of key reasons. First, GE's investments in commercial real estate (CRE) are looking increasingly toxic as the rate of CRE failures soars and CRE debt remains difficult to roll over.

Listen to what Richard Parkus of Deutsche Bank has to say about commercial real estate. He said that "We are not only not approaching stability, we are at a period of maximum deterioration."

We have often said that after the collapse of residential real estate in the last year, the next shoe to drop would be the commercial market. What is being wrung out of the home market is now beginning to be felt big time in commercial real estate. Landlords are putting together all kinds of packages, including free rent and other perks, and still prices are falling. It is believed that values are down a whopping 50% from their peak in 2007.

The Buffalo News reports that shopping center owner Developers Diversified (NYSE: DDR) is set to close on a deal to sell back 11 properties in upstate New York that it bought from privately-held Benderson Development in early 2004. The kicker: on a price-per-square foot basis, Developers Diversified will be selling out at a steep discount to its original purchase price.

With its stock price currently hovering at about 8/10ths of a penny, Circuit City Stores is nearing the day when it will completely cease to exist.

DJM Realty announced that it is has been retained to oversee the sale of the company's real estate assets. In a press release, Andy Graiser and Emilio Amendola, DJM Realty's Co-Presidents, commented that "Circuit City's real estate has begun to create interest among national and regional retailers and supermarkets. There are great opportunities for schools and other non-retail uses."

Trade groups representing developers and commercial lenders are lobbying Congress for a bailout. They are saying that $530 billion dollars of CMS's (commercial mortgage backed securities) are coming due in three years and $160 billion dollars are coming due next year.

The kinds of buildings involved include office complexes, hotels, shopping centers and other commercial buildings. Much like home mortgages, these CMS's were bundled together and sold to third parties and just as the market for home mortgages collapsed, so too this market's refinancing has all but come to a standstill.

Delinquency rates, though quite low, have been rising up to .96% in November from .62% in September. Some analysts predict this will rise to 2% by the end of 2009.

We now have a new financial dilemma. Congress and the Administration were reluctant to bail out the auto industry. The question again is: should we do this for commercial lenders as well?