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09/19/2007 - 10/02/2007
|Credit crunch: assessing impact|
By Rodman Schley
Commercial Valuation Consultants Inc.
As we move further into what is being called the “credit crunch,” which appears to be having an adverse impact on our national housing markets, according to a report published by the Federal Reserve Sept. 5, the overall impact on the rest of the national economy appears to be “limited.”
Continuing to be hardest hit by the national credit crunch is the residential market. In 2006, there were 1.2 million foreclosure filings in the United States. This was an increase of nearly 42 percent from 2005, according to RealtyTrac (a national firm that tracks the national real estate market). RealtyTrac is expecting foreclosure filings to reach nearly 2 million by year-end 2007. This equates to nearly one per every 62 U.S. households.
In addition, according to the recent Federal Reserve Report (The Beige Book), “Most banks reported that recent developments in financial markets had led to tighter lending standards for residential mortgages, which was having a noticeable effect on housing activity, and several noted that the reduction in credit availability added to uncertainty about when the housing market might turn around.”
Based on the preceding data, it is no surprise that the report also noted that “residential real estate and construction weakened in most districts.” However, with the negative impact associated with higher interest rates and tighter lending standards on residential lending, a positive impact should be felt in the Colorado multifamily rental market. Fewer residential loans likely will result in lower vacancy rates and higher rental rates in apartments and other renal housing, due to fewer people being eligible for financing and a higher demand for rental units.
Although the tighter lending standards have had a visible impact on residential lending, the commercial real estate markets have been far less impacted. In terms of commercial activity, the recently released Federal Reserve Report reported that “credit availability and credit quality remained good for most consumer and business borrowers.” In addition, it was reported that “economic activity has continued to expand” although at mostly modest to moderate rates.
Retail sales remained “generally positive,” consumer spending generally reported “increases in sales,” most reports on tourism were “positive,” service industries were “neutral to positive” and manufacturing “expanded.” All of which are generally good positive indicators for our commercial real estate markets. Overall, these factors have led to a commercial real estate market that is best characterized as stable to expanding.
Out of the 12 districts that report to the Federal Reserve Board, three of the districts reported “continued expansion in nonresidential construction and commercial real estate,” one reported commercial activity as “high,” and one as “strong.” The remaining districts reported the commercial construction and real estate markets as “steady or stable.” Overall, the commercial real estate markets appear to be relatively healthy.
In the Colorado market, the trend appears to be relatively similar to the national trends. Higher foreclosure rates and a turbulent residential real estate market have lead to tighter lending requirements on residential product. However, the impact on the commercial real estate market has been relatively limited in comparison, and would be best defined as relatively stable.
When the Fed meets later this month, an interest rate deduction of one-quarter percent to one-half percent is anticipated (likely the lesser of the two). This move is not intended as an investor and lender “bailout,” but rather a move to reduce any further fallout on the economy from the “credit crunch.” This move likely will provide further benefits to commercial borrowers and help to maintain the stable commercial real estate market.
As for the future, it is wise to keep a watchful eye on the economic indicators that move our commercial markets. Although the commercial markets have not been impacted at this time, the tides of change do move swiftly.
In the near term, economists predict that the residential real estate markets will decline further (to what extent is unknown), before seeing signs of improvement. On the flipside, the national commercial real estate markets are projected to remain relatively stable in most areas and expanding in others. Next time this year should tell an interesting tale.
|Colorado Real Estate Journal ©2005|