As the business world ground back into motion following the holidays, area businesses were warned the economy could seize up, as banks”™ efforts to shore up their consumer home loan portfolios may be in turn weakening their financial footing for commercial real estate lending.
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In Connecticut speeches this month, officials from the Federal Reserve Bank of New York and the Federal Reserve Bank of Boston expressed uncertainty about how the subprime crisis will affect commercial loans.
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Area bankers and developers said they are already seeing evidence of changed circumstances in commercial lending, which could have an impact on the short-term ability of Fairfield County developers to push projects forward.
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“There is no doubt real estate is turning around,” said Joe Nemia, president of CIT”™s commercial and industrial group, speaking last week at a Stamford gathering of the Association of Corporate Growth”™s Connecticut chapter.
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“We”™ve seen the financial markets change from ”˜capital for everyone”™ to ”˜no one can get anything,”™” agreed Kenneth McCarthy, an economist who is a managing director in the New York City office of Cushman & Wakefield, speaking in Greenwich.
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In prepared remarks Jan. 8 to members of the Connecticut Business & Industry Association, Boston Fed Chief Executive Officer Eric Rosengren said commercial banks bought into the subprime market through off-balance sheet investment vehicles, financed by commercial paper, or short-term loans that are exempt from regulatory scrutiny other forms of debt must run. While subprime loans made up only a small fraction of those vehicles, Rosengren said, investors were still skittish of buying into them. Some of those banks are now moving those off-balance sheet vehicles back onto their books.
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While Fairfield County does not lie within the Boston Fed”™s jurisdiction, Rosengren indicated the trends he discussed are national in scope.
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“The potential for a credit crunch remains,” Rosengren said. “Commercial banks are still an important source of liquidity and there are troubling developments at work.”
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Many local banks have yet to report fourth-quarter or year-end results, but Buffalo-based M&T Bank Corp. may have provided another early window on the developments to come in other parts of the Northeast. M&T, which ranks among the half-dozen largest banks in New York, reported a sharp rise in commercial loans due to companies”™ inability themselves to obtain commercial paper, forcing them to obtain more traditional loans.
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Both trends could push banks up against their loan reserve requirements, which in turn could limit future lending for real estate development and other big-ticket corporate purposes, but Rosengren said improved transparency in banks should shorten the current crisis ”“ though perhaps making it more painful, much like ripping a bandage off a wound.
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“Maintaining confidence in financial institutions and financial markets is key to a quick recovery from a crisis,” Rosengren said. “Falling real estate prices caused a credit crunch during the early 1990s New England downturn, as banks reduced lending to borrowers in general as a result of the banks”™ capital-adequacy problems ”¦ In today”™s situation, we are fortunate that most financial institutions have entered the current problems with significant capital cushions and that many U.S. financial institutions are moving to proactively address the problems.”
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Rosengren said the current situation could be mitigated to a degree by continued demand by area employers for talent ”“ and the need for affordable housing for those employees. Officials with Antares Investment Partners expressed confidence last week they can secure $500 million this year for the first phase of the company”™s Harbor Point development in Stamford, with plans to ultimately build 4,000 units of housing.
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“Although there has been some turmoil, regional and community banks continue to lend,” said Rae Rosen, an assistant vice president with the New York Fed, addressing an audience of the Business Council of Fairfield County in Stamford. “Lending standards have tightened but money is still available. It really depends on the financial credit of the consortium involved (in a project).”
