Printer Friendly

Beige Book: tight credit pushes fundamental deterioration.

Federal Reserve districts reported further deterioration in credit and commercial real estate fundamentals across most of the country.

Boston and New York district contacts provided mixed responses to their respective CRE markets, but New York markets were softer, on balance, than the previous report, according to the Federal Reserve's January Beige Book.

While some Boston district contacts remained downbeat about the region's CRE market, others noted "modest improvements in market conditions," the Beige Book reported. Two Boston district contacts expressed greater optimism for 2010 than in the previous report, while others remained pessimistic or uncertain. Optimistic sentiments included anticipated demand for commercial space by the public sector, positive gross domestic product (GDP) growth forecasts and stock-market-related improvements in investor sentiment. Pessimistic responses included weakness in retail sales, slow employment growth and looming bank failures related to commercial real estate loans.

A Boston-based mutual bank contact noted an increase in commercial real estate loan delinquencies and in the number of borrowers asking to restructure loans based on anticipated repayment problems. One contact described Boston's investment sales market as "dreadful," but another reported volume is "higher recently than it was earlier in the year."

In the New York district, "Commercial real estate markets were steady to softer in the fourth quarter, with the sales/investment market remaining moribund," the Beige Book said.

In most cases, New York district office markets were down from both the third quarter and a year earlier, the Beige Book said. Contacts reported Manhattan's office vacancy rates leveled off, but asking rents on class-A properties dropped 15 percent from the third quarter and 26 percent from the previous 12 months. Office market vacancies and rents surrounding New York City were mixed-- generally stable in upstate New York--but office property sales transactions were "exceptionally low" throughout the New York district in the fourth quarter, according to the Beige Book.

Credit quality also remained a concern for Philadelphia district bankers and in the Cleveland and Kansas City districts.

Some Philadelphia district bankers said overall loan volume declined because of write-offs, and although most of those bankers contacted for the January report said delinquencies and defaults have increased less rapidly than they had throughout most of last year, "bankers expect charge-offs to remain high for some time."

"Looking ahead, [Philadelphia district] bankers see slow loan growth starting around midyear as the economy recovers and loan demand picks up," the Beige Book reported. "Until then, they expect write-offs and the continuation of stringent credit standards to limit expansion in lending. One banker said that 'standards of lower loan-to-value [LTV] ratios and higher credit scores are being maintained, and that will limit loan growth,'" and another said that "'we are focused on preserving capital and minimizing future losses.'"

As credit stalled, nonresidential real estate firms in the Philadelphia district indicated leasing, purchase and construction activity continued to decline while vacancy rates increased at the end of the year.

"Contacts said that building owners have been reducing rents as leases come due for renewals, and tenants have been generally renewing leases for less space and shorter terms. One contact said that 'slower general business activity has resulted in many properties not generating cash flow. They are not worth the same amount of money they were worth a few years ago.' According to this contact, recent and prospective declines in commercial property values have induced many property owners to withhold them from the market and have deterred many buyers from making purchases. Contacts expect nonresidential real estate markets to remain weak through most of 2010," the Beige Book said.

Credit availability remained tight in the Cleveland and Kansas City districts, with some additional incremental tightening of lending standards--particularly for commercial real estate loans.

"In general, the credit quality of loan applicants remains weak or has deteriorated further ... delinquencies among commercial borrowers [especially real estate] remain elevated or are rising" in the Cleveland district, the Beige Book said. "Most banks have not changed the size of their work forces. However, three of our contacts said that they are in a long-term process to reduce employment as a result of restructurings and mergers."

Bankers reported weaker loan demand, stable deposits and a continued negative outlook for loan quality in the Kansas City district.

"Overall loan demand declined at a somewhat faster pace than in the previous two surveys. Demand fell moderately for both commercial and industrial loans and commercial real estate loans," the Beige Book said. "A few banks tightened credit standards on commercial real estate loans. As in the previous survey, however, credit standards for other loan categories were little changed. When asked about the cause of the continued weakness in bank lending, two-thirds of respondents cited weak demand from creditworthy borrowers, and some banks mentioned pressure from regulators. Almost all respondents reported lower loan quality than a year ago, and about a third expected loan quality to decline further in the next six months."

Construction supply firms in the Kansas City district reported especially weak sales, which most contacts attributed to a lending slowdown and weak commercial construction activity. Commercial construction activity remained at very low levels in the Atlanta, Minneapolis and St. Louis districts.

Contractors in the Atlanta district reported more projects on hold, with fewer starts for the early part of 2010. The Minneapolis district had "a slight uptick from very low levels of activity," and a commercial builder in the Minneapolis-St. Paul area said recent activity was very slow, but the builder expected more projects to bid on in the first part of 2010 as values of commercial properties sold in Minnesota increased in November from October, according to the Beige Book.

Vacancy rates continued to rise in the Kansas City district as prices and rents declined further. Commercial vacancy rates remained up in the Atlanta district--contacts continued to report downward pressure on rents--and recent vacancy rates for many commercial real estate sectors in the Minneapolis district were higher than one year ago.

Commercial and industrial real estate market conditions remained weak throughout most of the St. Louis district. A St. Louis contact said commercial real estate "has stalled." Industrial real estate and construction contacts throughout the St. Louis district reported a "sluggish environment." A Memphis contact said he did not expect the industrial real estate market to improve until signs of a more sustainable recovery are evident. The focus is on retaining tenants rather than recruiting new ones, one Memphis contact said, while a south-central Kentucky contact reported that while commercial construction is relatively strong, it consists mainly of education-related projects.

Real estate lending in the St. Louis district, which accounts for 73.5 percent of all loans, dropped 1.6 percent from mid-September to mid-December. Commercial and industrial loans, accounting for 16.5 percent of total loans, dropped 3.5 percent, and all loans outstanding at a sample of small and midsized St. Louis district banks declined 2.1 percent in the three-month period.

Commercial real estate lending in the Dallas district was scarce--loan demand was soft--and community banks continued to curtail residential real estate lending due to "tough regulatory requirements." Loan pricing was slowly returning back to normal, as some contacts have removed pricing floors or returned to original base rates such as prime, the Beige Book said.

The Dallas district expressed "some concern" as to how commercial real estate loans will be worked out as they come due, given the decline in collateral value.

"Investor interest continues to rise, however, with one respondent reporting a significant increase in the number of bids for properties on sale," the Beige Book said. "The primary concern among most contacts is still the uncertainty surrounding impending regulation. ... The outlook remained cautious, and most contacts said they did not expect any significant improvement until at least the fourth quarter of 2010."

While credit quality declined further in the San Francisco district, banking contacts reported loan demand largely stable compared with the prior reporting period. Contacts reported additional loan losses and continued tight standards for business and consumer lending, and businesses' uncertainty about the economic environment and caution in capital spending plans restrained commercial and industrial loan activity.

Despite weaker demand for commercial real estate in the San Francisco district--vacancy rates increased further in office and industrial space for many parts of the district--one contact in the Pacific Northwest said the market "may be approaching a bottom, citing an increase in leasing activity in response to favorable terms for tenants."

Boston district contacts in Hartford, Connecticut, and Boston reported "very limited" and "very slow" activity, respectively. In Hartford, deals included short-term renewals of expiring leases, with tenants willing to pay asking rents in exchange for flexibility on lease terms. A Boston contact reported a modest increase in office leasing volume in recent weeks--at "rock-bottom" rents--and a Providence, Rhode Island, contact "perceived an increase in deals under negotiation" as tenants "continued to drive very hard bargains on both rents and improvements," the Beige Book said.

Weak demand continued for nonresidential construction in the Chicago district as steep price discounts also drove many sales in the multifamily market. "Commercial real estate conditions deteriorated further," the Beige Book said. "Vacancy rates and subleasing activity increased, putting additional downward pressure on rents."

Apartment occupancy rates continued to fall and rents edged down in a weak apartment sector in the Dallas district as well. Elevated construction activity led to an oversupply, but contacts said activity will slow in the near term. The outlooks are "modestly optimistic," and "respondents expect a recovery in most of the major Texas markets in 2010."

While office and industrial leasing activity remained "feeble" in the Dallas district, and contacts said "nothing is going on and business is very slow," Richmond, Virginia, district agents reported an uptick in office and retail leasing activity during November and December.

The Richmond district includes the Washington, D.C., region, and one agent identified government agencies as a key source of leasing demand. In some cases, government agencies motivated new office construction in the area.

Several agents noted landlords were lowering their leasing rates in exchange for an extension of lease terms. One agent said more businesses were making decisions about whether to expand or upgrade their current facilities.

Another agent said national retail chains, attracted to relatively low unemployment rates across the Richmond district, were actively looking at new sites in anticipation of expansion in retail spending when the economy shows improvement. In most cases, bargain hunters trying to take advantage of low rental rates drove retail space demand. However, one agent noted that retail space in small strip malls was still suffering from high vacancy rates, while downtown retail space was generally in "good shape."
COPYRIGHT 2010 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2010 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Commercial
Comment:Beige Book: tight credit pushes fundamental deterioration.(Commercial)
Publication:Mortgage Banking
Article Type:Report
Geographic Code:1U1MA
Date:Feb 1, 2010
Previous Article:CRE markets see red.
Next Article:CBRE: vacancy rates slow in fourth quarter.

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters