Beige Book: Financing Difficult in Some Districts

MBA (6/13/2008 ) Murray, Michael
A number of Federal Reserve districts—Cleveland, Richmond, Chicago and Dallas—reported that obtaining financing remained difficult for some commercial real estate projects, based on the Fed's June 11 Beige Book.

Several Chicago district contacts said that declining credit availability for medium- and large-scale projects, such as hotels, significantly reduced the project pipeline and would limit growth going forward.

Office demand slowed in the Dallas district, except for areas dominated by the energy industry—including Houston and Fort Worth. Contacts said few new projects are being initiated despite high commercial construction levels because of difficulty obtaining financing, “particularly for large investments,” the Beige Book said. Industrial demand continued to weaken in the Dallas district.

In the Richmond district, contacts in Raleigh, N.C., and Columbia, S.C. said financing remained a challenge, and agents reported little to no new construction. Contacts in Baltimore, Md., and Washington, D.C., said projects were shelved until "at least next year," the Beige Book said.

Boston district respondents indicated that portfolio lenders—life insurance companies and commercial banks—continued originating commercial mortgages as Wall Street investment banks remained dormant and lending standards were relatively stringent.

“Commercial real estate contacts report that the Boston office building market, which was largely dormant in the first quarter, has seen a number of properties come up for sale in recent weeks; however, one contact notes that the number of closed transactions has not yet edged up significantly,” the Beige Book said.

While a small mutual bank in Boston continues to enjoy increased demand for its loans, the bank expects competition from Wall Street dealers to return by the end of the year, and a Providence, R.I., contact reported that commercial real estate in Rhode Island is currently "in a recession," the Beige Book said.

The Boston district said it expects market conditions would get slightly worse before getting better, with the turnaround expected by the fourth quarter of this year or the first quarter of 2009.

While the Boston District experienced a reduction in leasing activity, higher vacancy rates, negative absorption and stable to sliding rents, other districts experienced some of the same trends.

New York, Philadelphia, Richmond and San Francisco districts found leasing activity easing; vacancy rates edged up in the Kansas City and San Francisco districts, as well as in parts of the Richmond and St. Louis districts.

Overall rents were on the rise in the New York district, but sales moved downward in the New York, Philadelphia and Kansas City districts.

Contacts in the Philadelphia district anticipated sluggish activity as long as economic conditions remained uncertain or, as one contact said, "until the next uptick in the capital markets."

The New York district reported a sizable amount of available space coming onto the market, largely from financial firms, and it reported that the sales market for office properties was “especially weak, with prices estimated to be down 15 to 20 percent from a year earlier.”

Despite a modest increase in leasing activity in Minneapolis, the Minneapolis district reported negative absorption for office and manufacturing space, the Beige Book said.