Commercial real estate is next

A Bloomberg article today highlight’s the Commercial real estate sector (CRE) as the next leg down in the U.S. property bubble. The article states:

With 312,000 private-sector jobs lost in the last four months, foreclosure rates more than double what they were a year before, and the homeowner vacancy rate at a record high, it’s easy to see why commercial construction projects are losing their appeal.

Second, there are lots of reasons to suspect that commercial real estate was subject to some of the loose lending practices that afflicted the residential market. The Office of the Comptroller of the Currency’s Survey of Credit Underwriting Practices found that whereas in 2003 just 2 percent of banks were easing their underwriting standards on commercial construction loans, by 2006 almost a third of them were relaxing.

Fitch Ratings offers evidence of such eased standards, reporting that the share of securitized commercial loans that were fully amortizing — or structured to be paid off in full by the end of the loan period — fell from more than 92 percent at the start of 2002 to just 13 percent by mid-2007.

Tightening Up

Now we see from the two latest Federal Reserve Senior Loan Officer Surveys that this trend is being reversed: Almost 80 percent of domestic banks are tightening their lending standards for commercial real-estate loans.

If this is deja vu then we may face double-bubble trouble for real estate and the economy.

There already are signs that the commercial real-estate market may have begun to turn south. The GDP numbers for the first quarter of 2008 show that after growing 12.4 percent in the last three months of 2007, investment in nonresidential structures declined 6.2 percent and subtracted almost a quarter percentage point from growth.

Bloomberg News

The points to note from the article here are:

  1. The slowing economy is a drag on CRE construction and investment
  2. Lending practices were loose. It wasn’t just in subprime. Lending standards loosened all around due to easy money. This means CRE, Autos, Credit Cards, and Leveraged Lending are all sectors that had loose credit standards which have not come to the fore yet.
  3. Lending standards are tightening. This means new construction whas slowed. But, it also means that it will be more difficult to roll over debt for CRE projects in trouble.

The incipient decline of the CRE market is one very important reason that the credit crisis is not over despite the frequent calls to the contrary.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More