Beige Book: Financing Tightens as Activity Slows

MBA (7/25/2008 ) Murray, Michael
Commercial real estate activity was constrained in a number of Federal Reserve districts as financing continued tightening, according to the Federal Reserve's Beige Book.

Commercial lending activity in the Richmond district was generally stable—loan demand ranged from steady to slightly up across Virginia and the Carolinas—but activity weakened somewhat in the Washington, D.C. and Charleston, W.Va. markets, the Beige Book said.

Contacts in Washington, D.C., Charlottesville, Va. and Charlotte, N.C. reported further credit tightening, especially for projects in real estate-related industries. Credit quality showed signs of deterioration in Washington, D.C., Virginia and the Carolinas, where lenders reported an uptick in client bankruptcies and weaker financial statements.

The availability of financing continued to tighten for new commercial projects in the Chicago district, and an industry contact in the New York district said new hotel development has "virtually ground to a halt." The pipeline of existing development is "larger than ever"—close to 15,000 rooms, the contact said, but a number of the projects are having trouble getting adequate financing.

Sentiment in the Boston district was "decidedly morose" among commercial real estate contacts this cycle, with the exception of a small mutual bank that continued with robust demand for its small-scale commercial property loans, the Beige Book said.

However, despite enjoying brisk business and high commercial mortgage interest rates, a small Boston mutual bank reported that it could run up against lending capacity constraints before year's end, and lending officers at the bank were instructed to adopt a "more selective" stance.

"Compared with the last report, contacts [in Boston] are less optimistic that market conditions will improve by year's end," the Beige Book said. "One commercial broker is cautioning his clients to be prepared for a long period of stagnation in commercial property values and leasing demand."

Contacts in the Philadelphia district anticipated that markets would continue softening while economic conditions remain unsettled. One contact said "there's too much uncertainty, tenants adopt the do-nothing strategy" and negotiate short-term lease extensions rather than look for new or expanded space.

Commercial contractors in the Atlanta district also anticipated further softening through the remainder of the year with a weak 2009. Contractors in the Cleveland district do not foresee any dramatic downturn in business, but several contractors said lending standards are becoming tighter despite available financing.

Most developers in the Kansas City district expect declines in current prices and rental rates to continue into the near future. Several contacts in the district reported sluggish new construction due to increasing costs and scarce financing options, and some expect the sluggishness to continue or worsen in the near term.

Commercial real estate respondents in the Dallas district noted a continued decline in investment deals getting done, particularly for larger projects. There were reports of a general drying up of liquidity in the market and a flight of capital out of real estate, the Beige Book reported.

On the upside, however, higher quality assets did not see a major deterioration in value in the Dallas district.

Contacts in the San Francisco district noted a steep reduction in the total value of commercial construction permits in San Diego and an ongoing reduction in rental demand for commercial real estate in San Francisco.