Commercial real estate (CRE) lending conditions for the nation's community banks declined sharply in the second quarter of 2009 and appear 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 from 80.58 in the first quarter – 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, BIG says, falling 20.0% and 15.8%, respectively.
"The good news is that despite the downturn in the second quarter, lending opportunities abound for community banks," says Chris Nichols, president and CEO of BIG, 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."
Pricing and managing loans on a risk-adjusted basis is "critical," Nichols adds.
"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," he says.
According to the BIG CRE Index, a forward-looking benchmark of relative strength of CRE market conditions for community banks, the full impact of the recession is now weighing down the industrial sector, as 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 the year, the market still shed 57.5 million square feet of occupied warehouse space.
In the retail sector, vacancy rates for neighborhood shopping malls surged to nearly 10%. Rates in regional malls rose 6% to its highest level in over 10 years, while rents fell an average 1.5% from the first quarter.
Retail sales, not including gas and auto sales, dropped every month over the second quarter, BIG notes. Landlords remain under pressure because retailers are seeking to renegotiate their leases at more favorable terms.
The multifamily sector of the index fell to 84.39, down 7.70% from 91.43 in the first quarter of the year. 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 six in 10 metropolitan locations experienced a rise in multifamily vacancies, while more than 80% experienced rent declines.
The office sector also fell, dropping to 78.73 in the second quarter from 82.72 in the first quarter. Both Reisand Colliers International reported the sector posted its sixth consecutive quarter of negative absorption, pushing vacancies up an average 10%.
Average office rents dropped 3% year-to-date. Eight in 10 metropolitan areas reported rising vacancy rates and nearly nine in 10 suffered from rent declines.
SOURCE: Banc Investment Group