Here’s the good news: The economy may be turning the corner thanks to a heavy dose of government stimulus. And since March stock and bond portfolios have rebounded and at least house prices have bottomed after a three year freefall.

But lots of problems remain — not just slowness of job recovery. Just check the corner I watch for a living: commercial property. This sector continues to sink, buried in hundreds of billions of dollars in bad loans to overleveraged owners, who paid too much during a frenzied 2004-2008 transaction binge. Representative of these toxic assets, half-built condo projects, see-through floors in office buildings, and papered-over mall store fronts stand on view from coast to coast.

Commercial real estate usually lags post-recession upturns. But continuing declines in office, shopping center, hotel, apartment and warehouse markets strain the nation’s still-fragile banking sector and threaten to temper prospects for sustained economic recovery.

Out of mutual self-preservation, property owners and their lenders obfuscate the extent of losses in a dance of mutual convenience called “extend and pretend.” Banks don’t foreclose on defaulting borrowers so the financial institutions can avoid booking losses, which could spook resuscitating credit markets. Government regulators encourage this kabuki theater and pump money into banks helping them build up loss reserves so they can eventually take write downs and reconcile balance sheets. Everyone has been hoping that the economy can recover quickly enough to bridge some of the declines. But the gloomy jobs picture and burdensome household debt (all those mortgage, credit card, car, and student loans) combine to hobble demand for office, retail, and apartment space as well as hotel rooms.

So “extend and pretend” will likely turn into a bridge to nowhere — at some point this year commercial properties will inevitably crash land, after losing on average 40 percent to 50 percent in value. Premium locations in the nation’s important gateway cities will fare better — investors already circle properties in New York, San Francisco, and Washington, looking for bargains. That may well keep a floor on prices in such cities — but not in secondary and tertiary markets not directly linked to global pathways. Office rents in many cities have retreated to 1980s face rates as occupancies continue to decline. Apartments and industrial properties are registering record vacancies and rent erosion.

Finally facing reality, tapped out owners begin to turn back the keys to lenders — they don’t want to maintain debt service payments in projects without hope of generating expected revenues or recouping lost value. That’s what happened to the Peter Cooper Stuyvesant Town complex in Manhattan late last month. Bought at market highs for $5.4 billion in 2006, the apartments may be worth about $1.8 billion today. Savvy investment pros like Tishman Speyer, Black Rock, and their pension fund clients take hundreds of millions of dollars in losses on their equity investments, but non-recourse loans pin most of the write downs on lenders (including Fannie Mae and Freddie Mac) and an array of bond holders, who could land in extended and messy litigation scraps over who has rights to what remains.

Out of necessity, more banks will start to drop the foreclosure hammer, taking control of troubled assets and pushing out owners who can’t or won’t maintain properties. Each such action risks permanent diminution in value. More regional banks will fail under the weight of bad real estate debt (15 so far in 2010 after 130 last year) and the FDIC will take over, then foreclose and try to sell property assets. As lenders start to recognize losses, buyers and stressed owners will gain greater confidence about pricing levels, helping revive moribund transaction markets. But few investor players expect any chance for a robust comeback unless the economy starts to generate large numbers of jobs.

Developers, meanwhile, will be dead in the water for several years, tamping down demand for construction jobs and materials — commercial building pipelines across all property types register their lowest volumes on record. Most recent vintage projects, especially condominiums and hotels, head directly into default — tenants continue to economize and expect generational low rent terms not the record highs anticipated by builder pro formas at ground breakings.

All these setbacks delay recovery in the financial sector and the overall economy — banks must reserve for losses instead of lending to businesses to help stimulate hiring. State and local governments suffer declines in tax revenues from depreciating property values and lower sales volumes. Beyond lost construction jobs, the real estate sector collapse also vaporizes tens of thousands of high-paying “middlemen” professionals — lawyers, brokers, investment managers, appraisers, mortgage bankers, and analysts who had gorged in the fee fest from frenzied property buying, financing and flipping. The vanishing value mirage dissipates an important industry and destroys paper wealth on which credit markets staked enormous investment bets.

Any good news here? Yes. From all this carnage, expect cash buyers to make opportunistic purchases and eventually reap outsized profits. But how many cash buyers are left at all?

The good news is that and states cities have begun fixing bridges, paving roads, repairing subway tracks, and upgrading sewage treatment plants.

And it’s clear–throwing stimulus money at ad hoc projects, generating jobs in a serious recession, can add value, especially when the funds are targeted at refurbishing aging systems which otherwise might break down or even collapse.

But let’s not pretend this short-term, ad hoc spending remotely addresses America’s infrastructure needs. The United States desperately requires a forward-looking plan for 21st century infrastructure that can support and sustain renewed economic growth and accommodate 100 million more Americans over the next 40 years.

Our last game-changing national infrastructure initiative dates back more than five decades ago to President Eisenhower’s interstate highway system–nearly 50,000 miles of sleek freeways, which spurred dramatic suburban growth and enabled long distance car and truck travel.

The problem is that once most interstates were completed in the late 1970s, we essentially stopped paying attention to infrastructure planning. Today the road-based model is an anachronism–unsustainable in a new century.

Since 1980 vehicle miles traveled has doubled and more than half of Americans, about 155 million people, live in car-dependent suburbs. That’s as many people as lived in the entire country in 1950. Many of those highways we built a generation ago reach the end of their effective lifecycles and just can’t accommodate the 200 million plus cars on our roads.

And while many of our fastest growing metros neglected mass transit over the past 30 years, we built only one new international airport (in Denver).

Is it any wonder why most of our major metropolitan areas face mounting traffic and even gridlock? The resulting congestion causes more than frustration and angst. Lost time constrains productivity and saps our economic competitiveness by increasing costs for moving people and goods. Driving-related expenses now equal or eclipse housing costs for residents in some markets.

At the same time, the nation’s gateway ports and airports will be stretched to accommodate forecast shipping requirements and airline passenger growth.

So where’s the strategy? Funding myriad local transportation projects can’t pass competitive muster when Europe builds transcontinental transportation networks to link commercial centers and China spends trillions of dollars on integrated road, rail, transit and airport systems. Even Canada has initiated a concerted, joint national-provincial program to rebuild transport infrastructure around key national hubs and gateways.

In Infrastructure 2009: Pivot Point, a report I just authored for the Urban Land Institute and Ernst & Young, we recommend a new approach for getting America out of its deep ditch, the federal government taking the lead. Key elements:

Identify National Networks: The President and Congress must identify new interconnecting national transport networks—rail, road, and air. Corridors for high speed passenger and freight rail must link to surrounding regional markets and merge into cross national networks. Innovative transit schemes, connected to airports and train stations, must help reduce car dependency, prevent bottlenecks in commercial centers, and decrease pollution.

Plan Holistically: Transportation policy and funding must integrate closely with land use planning and housing policy. Planners need to encourage development of more compact, pedestrian friendly neighborhoods tied into transit networks, connecting to commercial hubs. Separate schemes for roads, subways, and subdivisions won’t work anymore.

Consolidate Government Management: Federal, state and local governments must restructure agencies responsible for transportation, housing, water, and energy so that they manage and execute infrastructure policy in concert. The White House should develop national infrastructure strategy, working with a high level commission of policy experts, to identify national networks and select merit-based projects which fit objectives. States must break down silos between various transport agencies and local land use authorities to formulate long-range regional plans, which tie into national networks and coordinate with federal programs.

Change Funding Approaches: New infrastructure networks and necessary repairs will cost trillions of dollars over the next two decades. Funding burdens must shift from taxpayers to users, because depleted government coffers will not sustain initiatives. There’s no choice: we need higher gas taxes and more toll roads. Innovative user fee approaches like vehicle miles charges should be implemented, using new transponder technologies. Not only will these fees raise revenues to pay for new systems, they also will help people adjust behaviors to realize more economically efficient travel.

Federal funding to states and local governments must link directly to carrying out national objectives. The much talked about Infrastructure Bank is a no brainer to help finance national networks and attract more private capital, including advancing public private partnerships.

The ongoing economic dislocation has been a rude shock to Americans, who suddenly question whether we can maintain our living standards and lifestyles. But neglect of sound infrastructure planning will threaten the nation’s ability to recover and hobble our economy for generations. The Eisenhower model has seen its day. We need a new national plan–now!

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Lost in the election scramble, bank rescues and heated debate over government bailouts is the simple fact that American needs to rebuild its wealth — we’re busted.

The national debt grows to over $9.8 trillion and climbs rapidly while the current $407 billion federal deficit has nowhere to go but up as the federal government grapples with a teetering national economy. The next president will struggle to recapitalize the country while hundreds of billions of dollars go each year just to service our prodigious national debt. For all the belt-tightening talk, eliminating $16.5 billion in annual earmark expenditures would make only a minor dent in the huge federal deficit.

So what do we do — when our Treasury registers empty and we confront so many other challenges?

In the first presidential debate, both candidates conveniently sidestepped the hard choices they will face. John McCain suggested a possible spending freeze and Barack Obama admitted some of his big ticket plans may need to be shelved for at least a while. At least, Obama made passing reference to rebuilding the country’s increasingly dated and inadequate infrastructure as an important priority.

In fact, a retooled national infrastructure will be an essential part of the solution to maintaining our economic clout and future prosperity, while providing the needed stimulus of a near-term jobs engine.

The challenges are huge: Our once-vaunted interstate system is overwhelmed by traffic around major gateway cities and along truck corridors. Our metro regions lack public transit systems robust enough to tame oil consumption and sustain future growth. The nation has literally zero high-speed rail lines and may need four or more major new airports. Major East and West coastal ports have turned into huge bottlenecks and our national freight shipping network needs radical upgrading. Chronic traffic jams, lost time, higher driving and logistics costs can only get worse as the U.S. population expands by an expected 100 million people between now and 2040.

We’ve responded before. In the 19th Century, the federal government jump-started commercial growth with canals and then the transcontinental railway. Early in the 20th Century we underwrote development of an electric grid to trigger a new industrial era. Post-World War II interstate construction and airport building enabled explosive national and metropolitan development.

Now we need a new generation of infrastructure building, led by the new president and Congress. And our approach needs to be truly strategic. We need to link critical goals — on the one hand, enhanced mobility and efficiency that enable us to compete with more advanced European and Asian networks, and on the other, reduced oil dependency and a “green,” lighter environmental footprint that matches the carbon-reducing demands of the times.

What are the cornerstones that can form a successful, wealth-producing, energy-efficient strategy?

- Use federal funds to Integrate systems and modes. Set federal funding guidelines to force states and regions to integrate their highway, mass transit, rail and airport planning, combined with local initiatives to reduce car dependency. We need smart, multi-modal, inter-regional solutions — no more single-shot “Roads to Nowhere.” The huge government deficits we face make the case for strong federal incentives — perhaps a national infrastructure “czar” to insist on integrated, economical approaches — all the more compelling.

- Promote continental connections that keep people and goods flowing. For example, world-class connections of the nation’s coastal economic gateways must be tied efficiently to primary interior cities and transport hubs such as Atlanta, Dallas and Chicago.

- For our major metros to prosper, insist that rail, light rail and subway systems efficiently link suburban development hubs to center cities, intercity rail stations and airports. High-speed rail lines should link cities within major multi-state regions, offering alternatives to air and car travel. More vertical, high-rise residential developments should be encouraged around rail and transit stops.

– Make users pay. Interstates and highways must be tolled not only to pay for new infrastructure, but also to provide incentives for people to find more efficient means of travel and cost-effective places to live and work. Freeways have subsidized car travel and trucking as well as encouraged sprawl by not charging drivers and developers for the cost of building and maintaining these road systems. Fully loaded driving costs and transit alternatives would encourage people to drive less. “Drill, drill, drill” is no answer when vehicles clog expansive arterials into primary metro destinations.

This new infrastructure model won’t come cheap. But an Urban Land Institute report estimates that more than 5 million jobs would be created if the U.S. invested the full $1.6 trillion needed over the next five years just to meet current infrastructure needs. A government commission has asserted we need at least $100 billion in additional yearly outlays to bring our roads, rails and airports into the 21st century.

The principle’s simply: to pay our existing bills, we need a growing economy. Infrastructure’s a lead way to do that.

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