Lenders pull in credit reins
Tricia Lynn Silva
As the country braces for tougher economic times ahead, lending institutions are following suit, taking a more conservative stance on new real estate loans by stiffening underwriting requirements.
The biggest change is in the amount of preleasing now required for a project, industry sources say. One developer, for example, recently saw the preleasing requirements for loans on two of his retail development projects jump from a standard 50 percent to 75 percent.
While San Antonio has never been a market heavy on speculative construction, the new underwriting requirements could mean that it will be some time before the city sees any surge in new commercial construction, be it office or retail, industry sources say.
"We have been looking at our underwriting; we've become more cautious," says Philip E. Nelson, vice president of Compass Bank. "We are still in the market, but I will tell you, particularly on office and retail, we have become more cautious, looking more at preleasing."
The slowdown in lending, he says, is a response to different market forces that have been in place since late 2000 and early 2001. At the national level, the recent bankruptcies of larger retailers like Bealls and Weiner's -- and an overall drop in retail spending -- have caused lenders to tread more carefully when it comes to new retail projects, Nelson says.
A case in point: only 40 percent of the tax rebates that were sent out by President Bush have been put toward consumer spending, explains John Heasley, executive vice president of the Texas Bankers Association. Most people, he adds, used the extra cash to pay off existing consumer debts.
Pulling back
At the local level, companies like SBC Communications Inc. and AT&T are reducing their overall office-space lease commitments. That pull-back is contributing to the city's softening office market, Nelson says, which means lenders are less inclined to lend money for new office projects.
"Everyone really was cognizant of the fact that the economy was roaring along for a long time," says Kirk Oden, a principal with the commercial mortgage-banking firm Trinity Real Estate Financial Inc. "And on the banking side, businesses had their yellow lights on anticipating a downturn. Between late last year and early this year, lenders have slowly but steadily become more conservative."
That tendency was cemented further in the wake of the Sept. 11 terror attacks, which further jolted the economy, sending it into an even lower gear, industry observers add.
While Oden does not believe that any particular segment of the commercial building market has been more affected than another in this present climate, he does concede that lenders, in general, are always more cautious about high-end office projects. "These are expensive assets to put on the ground," he says. "... To do something like a Concord Plaza or a Koontz McCombs project, those are expensive things, and lenders are especially cautious about them."
Balancing act
That tighter underwriting requirements could slow new construction in the city is not necessarily a bad thing. As Todd Gold points out, this is simply a means of bringing some balance back into our commercial markets.
"We are sending a strong signal," says Gold, who is senior vice president of Koontz McCombs Realty Services Inc. "We are going to let the economy recover, let demand catch up and do the projects that make sense.
"We are not going to see much speculative construction," Gold adds, "but we haven't had a lot of that in the first place."
San Antonio has never been a city that did a high degree of spec building in response to trends like the high-tech boom. As a result, the Alamo City has not had to weather the busts that other cities have endured when the boom comes to an end, Gold and others say. Having a more stable market will also help us weather these tougher economic times, they contend.
But there is a balancing act in play with respect to the lenders as well -- as the attempt to reduce risk also reduces the lenders' options for earning income.
"You don't make as much money (as a bank) if you're holding the cash," says Keith Phillips, senior economist for the local office of the Federal Reserve Bank. "Banks are at a difficult juncture right now."
"Banks here have to figure out how to make this work," Oden adds. "If you make loans in a bad economy, you could suffer a great loss. But when you don't make loans, you are not receiving the fees or interest income."
At present, however, the teetering economy carries more sway with banks in regard to real estate development loans than the need to generate more income, industry observers say.
"The key word is confusion, and nobody likes uncertainty," says Carl Bohn, vice president of the local office of The Weitzman Group. Bohn has a letter of intent for an 18,000-square-foot lease for a new medical office redevelopment project. Construction on the project has yet to begin because the lender changed the preleasing requirement from 0 percent to 70 percent, Bohn says.
"Nobody knows how long the economic slowdown will last, if or when a stimulus package will be put into place, and what will the target of that package be," Bohn says. "Will it be geared toward consumers or corporations?"
And the uncertainty is not likely to end soon. "Lenders will continue to be cautious well into 2002," Oden says. |
