March 19 (Bloomberg) -- GE Real Estate’s commercial property losses could run as high as $3.6 billion in a worst- case scenario for the U.S. economy, according to Jayne Day, the unit’s chief risk officer.

The loss estimates on the unit’s $85 billion in assets were generated under a so-called Federal Reserve “stress test” scenario, Day said in an investor presentation in New York. The loss in lending on property could reach $1 billion in a worst case, while equity losses could total $2.6 billion, she said. General Electric Co.’s property unit has had $400 million in lending losses and written down $400 million in equity in 2008.

“GE does not have to sell assets in these situations,” Peter Sorrentino, who helps manage $15 billion at Huntington Asset Advisors in Cincinnati, said on Bloomberg TV. “A lot of the property that they’re invested in, they basically control, so they can ride it out. As long as they’ve got the cash flow to cover vacancies, they can ride this out, they’re not a forced seller.”

GE, based in Fairfield, Connecticut, has lost about 70 percent of its market value in the last year on concern that its financial unit, GE Capital, which generated 48 percent of its profit last year, may encounter losses similar to those of commercial banks. GE Chief Financial Officer Keith Sherin called the “deep dive” informational meeting at Rockefeller Center to quell investors’ concerns.

No Leveraged Loans

GE Real Estate said its original outlook for 2009 called for a loss of $700 million.

Sherin estimated that GE Capital, the parent of GE Real Estate, would net $5 billion this year. With the Fed’s worst- case scenario applied to the entire division, GE Capital’s earnings would be zero.

GE’s losses may appear “so much smaller” than leveraged firms like real estate investment trusts because of the way losses must be magnified when they are based on leveraged loans, GE Real Estate Chief Executive Officer Ronald Pressman said in the presentation. Because GE doesn’t buy with leveraged loans, it incurs losses based on the depreciation-based model rather than a leveraged-loss model.

“We have significant layers of protection in how we’ve underwritten this debt book,” Pressman said. “We do believe we have been diligent and conservative in applying sound real estate practices.”

Commercial property values have fallen 21 percent since their 2007 peak, according to the Moody’s/REAL Commercial Property Price Indices.

Construction Loans

GE Real Estate avoids land loans, single-family residential developments, malls, second mortgages, trophy buildings and locations where property rights are not respected, Day said.

“We run our operations differently from other companies in what we do and what we don’t do,” Pressman said at the presentation.

The division also avoids construction loans, Pressman said. About 1.5 percent of its commercial real estate portfolio consists of such loans, compared with 32 percent of banks’ commercial real estate portfolios, he said. GE’s construction borrowers have fallen behind on payments at a rate of 3.8 percent compared with 11.4 percent at commercial banks, he said.

“Most of our small construction and development portfolio was acquired in opportunistic deals at a discount in 2008,” Pressman said.

‘Green Light’

The equity portfolio includes $5.5 billion of property purchased before 2006; $10.1 billion in 2006; $14.8 billion in 2007 and $2.6 billion in 2008, according to Pressman. The primary driver of the loss is about $3.38 billion from 2007 properties, GE said.

Twice a year the company assesses its commercial real estate debt in 54 U.S. cities and 32 European markets, Day said. The only market with a “green light” for growth is Washington, Day said.

“We think were looking into this market very realistically not sugarcoating it in any way,” Pressman said. “We think our portfolio is solid.”

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.

Last Updated: March 19, 2009 14:47 EDT