SAN FRANCISCO, CA - CRE lending conditions for the nation's community banks declined sharply in the second quarter of 2009 and appears unlikely to improve for the remainder of the year, according to the Commercial Real Estate Lending Index from Banc Investment Group (BIG).
The BIG CRE Index® fell to 71.24 in the second quarter of 2009 from 80.58 in the first quarter of 2009 – an 11.5% decline. From the Index's baseline period beginning April 30, 2007, lending conditions for community banks have deteriorated 28.7%. Conditions in the industrial and retail sectors took the biggest hit, falling 20.0% and 15.8% respectively.
BIG's data and market analysis also indicate that the lending environment is likely to worsen for the remainder of 2009. Because CRE lending is such a large component of many community banks' loan origination, institutions could remain under pressure in the second half of the year.
"The good news is that despite the downturn in the second quarter, lending opportunities abound for community banks," said Chris Nichols, President and CEO of Banc Investment Group, the capital markets subsidiary of Pacific Coast Bankers' Bancshares. "Loan pricing is markedly higher and the risk in lending has dramatically increased because of the stressed environment. In this economy, it is critical to strengthen the credit origination and management process by pricing and managing loans on a risk-adjusted basis. Many institutions are facing challenges because they underpriced loans on a risk-adjusted basis and allowed other factors, such as relationship management, to drive the terms of the credit."
The BIG CRE Index is the nation's only forward-looking benchmark of relative strength of CRE market conditions for community banks. Values in the BIG CRE Index are derived from leading third-party providers and data collected by BIG's consulting services group, which offers the BIG Loan Pricing Model used by community banks across the country. The BIG CRE Index is calculated using a proprietary algorithm. Published quarterly, the BIG CRE Index focuses on the four major commercial real estate sectors – multifamily, office, retail and industrial – and covers the largest metropolitan areas in the U.S.
The following is a synopsis of community bank lending conditions nationwide in the second quarter of 2009 for each of the major commercial real estate lending categories:
Retail:
The retail sector of the Index fell to 65.99, down 15.8% from 78.36 in the first quarter of 2009.
Vacancy rates for neighborhood shopping malls surged to nearly 10%, and rates in regional malls rose 6% to its highest level in over 10 years. Rents fell an average 1.5% from the first quarter. Not surprisingly, retail sales (less gas and auto sales) dropped every month over the second quarter. Landlords remain under pressure because retailers are seeking to renegotiate their leases at more favorable terms. Eight in 10 markets experienced a rise in vacancy rates and nearly 9 in 10 posted negative rent growth.
Industrial:
The industrial sector of the Index fell to 55.84, down 20.0% from 69.80 in the first quarter of 2009.
The full impact of the recession is now weighing down the sector. Factory orders remain subdued, even with warehouse inventories at low levels. Colliers International notes that even with a 50% decline in warehouse construction compared to the first quarter of 2009, the market still shed 57.5 million square feet of occupied warehouse space.
Multifamily:
The multifamily sector of the Index fell to 84.39, down 7.70% from 91.43 in the first quarter of 2009.
As unemployment rose, credit tightened, gas prices rose, and vacancy rates jumped to more than 7.5%. Rent growth dropped 60 basis points, according to Reis, Inc. Across the U.S., about 6 in 10 metropolitan locations experienced a rise in vacancies while more than 80% experienced rent declines.
Office:
The office sector of the Index fell to 78.73, down 4.8% from 82.72 in the first quarter of 2009. Both Reis, Inc. and Colliers International reported the sector posted its 6th consecutive quarter of negative absorption, pushing vacancies up an average 10%. Average rents dropped 3% year-to-date. Eight in 10 metropolitan areas reported rising vacancy rates and nearly 9 in 10 suffered from rent declines. The spread between vacancies in suburban regions and city centers is rising.
The baseline values of BIG's CRE Index reflect the relative strength (or weakness) of each sector compared to the second quarter of 2007. Each quarter, the percentage change in the BIG CRE Index takes into account both macro economic factors, as well as specific probabilities of default in each category. These factors include, but are not limited to, employment, income, rents, vacancy and absorption rates. Movements of BIG's CRE Index are expressed as percent changes, rather than as changes in index points. Point changes are affected by the level of the BIG CRE Index in relation to the baseline period, whereas percentage changes are not. BIG's CRE Index incorporates both historical averages (short- and long-term), as well as forward projections.
Source: Banc Investment Group