Commercial real estate signals moderating growth (Part II)

While the commercial real estate market has been one of the economy's standouts in 2006 and 2007, the risks to continued growth and appreciation are readily apparent. The era of easy money has come to an end and the pendulum has swung the opposite way to restrictive lending practices. What began as concentrated weakness in the sub-prime mortgage market has rapidly evolved into a credit crunch for many sectors of the economy including, plummeting financial institution stock prices and multi billion dollar charge-offs by investment and money center banks. When banks are taking losses, lending practices often tighten to protect the financial institution from further losses. According to the October senior loan officer opinion survey on bank lending practices over the past three months published by the Federal Reserve Bank indeed have tightened further. In the October survey both domestic and foreign institutions reported having tightened their lending standards and terms on commercial real estate lending. 50% of domestic banks reported having now tightened their lending standards, including those borrowers with excellent credit. Regarding demand for commercial real estate financing, approximately 35% of domestic and foreign institutions, up from about 25% in the July survey reported that demand for commercial real estate borrowing had weakened. The combination of slower economic growth and further tightening of lending standards by banks on commercial real estate lending, along with falling demand for financing, may pose a significant headwind to commercial real estate. Despite these financial headwinds the strong global economy, improvement in factory activity and healthy export growth may be the only saviors to limit the downside for commercial real estate for the balance of 2007. Bruce Mason is the chief economist at Union State Bank, Orangeburg, N.Y.