New Commercial Real Estate Lending Index Introduced

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“Commercial Real Estate lending conditions will likely deteriorate further after a sharp drop in the first quarter of 2009, creating both new opportunities and challenges for community banks,” said Chris Nichols, CEO of Banc Investment Group the capital markets group of Pacific Coast Bankers’ Bancshares. “CRE lending conditions were impacted by a perfect storm of economic uncertainty, tighter credit, failing consumer confidence and substantially higher unemployment. Of particular note was the reversal of fortunes in the multifamily market, which had been fairing well, but turned negative in the first quarter.”

That is the conclusion drawn by the BIG CRE Index. Launched this month, the BIG CRE Index is the nation’s only forward-looking benchmark of the relative strength of commercial real estate (CRE) market conditions. The BIG CRE Index is published quarterly and focuses on the four major commercial real estate sectors – multifamily, office, retail and industrial – in America’s largest metro areas.

According to the CoStar Group, the so-called stress tests administered to banks by the Federal Reserve indicate that under worse case scenarios the 19 largest banks in the country could see commercial real estate losses of $53 billion in 2009 and 2010. This represents only 8.5 percent of all commercial real estate loans.

The initial BIG CRE Index reveals that CRE conditions worsened during the first quarter of 2009, falling nearly 11 percent to 80.58. The baseline period was defined as April 30, 2007.

Retail:

The retail sector index fell more than 11 percent to 78.36 from 88.07 in the fourth quarter of 2008. The retail sector has declined more than 20 percent from the 103.50 level seen during the second quarter of 2007.
Vacancy rates for neighborhood shopping malls soared to 9.5 percent.
Vacancy rates in regional malls rose to a record high of 7.9 percent.
Overall, 63 out of the 76 markets for which data was collected experienced a rise in vacancy rates. All but one posted negative rent growth.
Rent fell by 1.8 percent declining more in the first quarter of 2009 than the 1 percent decrease measured for all of 2008.

Office:

The office sector fell 10.62 percent during the first quarter of 2009 to 82.72 down from 92.55 during the previous quarter.
The office sector was hurt by the consolidation and downsizing in the financial services sector.
Office vacancy rates rose sharply during the first quarter of 2009 and now stand at 15.2 percent.
During the first quarter, 12.3 million square feet of office space was completed having vacancy rates of between 50 and 60 percent compared to the 30 to 40 percent vacancy rates of 2007 and 2008.
Nationally, rents declined by 2.3 percent.

Industrial:

The industrial sector of the index decline by nearly 17 percent during the first quarter of 2009 to 29.80. During the fourth quarter of 2008 the sector stood at 83.96. The sector is down more than 31.5 percent from the 101.91 reported during the second quarter of 2007.
The Index predicts the domestic warehouse market will soften as a result of weakness in the domestic shipping business.
Inventory is building up in coastal ports as less consumer spending decreases demand, a condition expected to further impact the industrial sector in coming quarters.

Multifamily:

The multifamily sector of the index dropped more than 6 percent to 91.43 in the first three months of 2009 from the 97.42 level of the final quarter of 2008. The sector is off only 3.81 percent from the second quarter 2007.
Vacancy rates rose to 7.2 percent during the first quarter.
Rent growth for the quarter was negative 1.1 percent.
Compared to the second quarter of 2007, the multifamily sector actually improved slightly during 2008. The economic downturn began making itself felt in the sector during the first quarter of 2009 as the number of vacancies increased while rents declined. Construction continued at a steady pace while net absorption rates dropped.

The quarterly percentage change in the Big CRE Index takes into account both macro economic factors and the specific default probabilities of each category such as employment, income, rents, vacancy and absorption rates. Movements of the Index are expresses as percent changes rather than changes in index points. Point changes are affected by the level of the BIG CRE Index in relation to the baseline period (second quarter 2007). Percentage changes are not.