Credit crunch still grips commercial real estate


CHICAGO -- The commercial real estate industry remains consumed by a credit crunch that has made financing for nearly every kind of project difficult if not impossible to obtain.

Even a year after the issue began to receive widespread attention, the credit crunch continues to feed discussion at all levels of the industry.

"Money is the mother's milk of real estate, and it is something that we just don't have right now," said Eugene Carver, president of the American Society of Real Estate Counselors.

"This industry is experiencing the worst shutdown in liquidity that I have seen in my business life," said Norman Perlmutter, chairman of Chicago-based Heitman Financial Ltd. "It doesn't mean it wasn't warranted. But is it necessary for it to be as dramatic as it is now? That's a big question."

It has been one year since the Urban Land Institute formed a task force to examine ways in which more liquidity could be brought into the nation's real estate markets, which began experiencing financing difficulties in the spring of 1990.

Donald Riehl, a California developer who chaired the task force, reported at the group's recent meeting in Seattle that the situation has only gotten worse. He predicted that in 1991 and 1992 there would be a net loss of mortgage capital from the industry.

The pessimism was shared by more than half of those in attendance at the recent meetings in Chicago of the real estate counselors, who said in a survey that they expected the credit crunch to last at least another year. In fact, few in the real estate industry expect the picture to brighten any time soon.

"The credit crunch that's now affecting real estate is likely to affect other segments of the economy as well. There is going to be a huge competition for funds, not only in the real estate industry but worldwide," said Amy Jorgensen, a managing director of New York-based Morgan Stanley & Co.

Ms. Jorgensen said that during the next three years between $12 billion and $18 billion in existing commercial property mortgages will be coming due each year. Many lenders are looking at Eastern Europe, the Soviet Union or the Persian Gulf as better places to reinvest those funds.

John LaWare, a member of the Federal Reserve Board of Governors, said the current credit crunch bears little resemblance to a traditional crunch, in which the demand for borrowing far exceeds the supply of funds, thus driving interest rates high.

"What we really have today is a confidence crunch. We have reduced the reserve requirements and lowered interest rates, and the banks have used that to bolster their bottom lines and not to loosen lending," Mr. LaWare said.

Commercial banks still hold as much as $350 billion in commercial real estate mortgages. But many have decided that enough of their assets are allocated to commercial real estate and have stopped making new loans on those projects, ranging from offices to shopping centers to warehouses.

The credit crunch, however, has not affected residential lending. Homebuyers still find readily available mortgage money at rates that remain below 10 percent.

The problem, said real estate analyst Anthony Downs, is that while homebuyers can get money, homebuilders can't find the financing to acquire and develop new residential land.

"It is a peculiar economy," said Mr. Downs, senior fellow at the Brookings Institution in Washington. "My bank has failed, but my toaster is still working."

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