As I write my inaugural post, signs of a recession are mounting and the headlines in the business pages get bleaker by the day. Economists surveyed by The Wall Street Journal have become increasingly pessimistic about the economy. Testifying before the Senate Banking Committee just a few days ago, Fed Chairman Ben Bernanke voiced a gloomier forecast than his previous statements, emphasizing that “downside risks to economic growth remain.” Credit is more expensive and less available. Nervous real estate buyers have retreated from the playing field and investors have withdrawn from the CMBS market until the dust settles. The bad news of course is that commercial real estate transactions are down—and with them, Phase I ESA activity, which just took a downturn for the first time since 2002.
Commercial real estate prices have declined, forcing lenders to sell securities backed by commercial real estate or take write downs. Risky mortgages have already cost banks and investors more than $100 billion in losses and pushed the U.S. economy that much closer to a recession. Financial institutions are trying to get a handle on how bad their losses will be, and that uncertainty makes them less willing to lend capital to borrowers. Lenders and the investment community are understandably jittery—as are the environmental consultants who support real estate transactions. The banks that are lending are exercising tighter lending standards across the board—putting all types of risk, including environmental risk, in the spotlight. This is a significant change in our market, and arguably, the only bit of good news about what’s been happening lately. As recently as a year ago, lenders were issuing loans—sometimes with little or no due diligence conducted—in order to compete with other lenders and meet the frenetic pace of deals with multiple bidders at the buying table. Those days are over. At least for now.
The events of the past two quarters have been a double-edged sword for environmental consultants. On the one hand, transactions are down. On the other hand, the general mantra now is more conservative underwriting. Deals that may have sailed through a year ago with little or no due diligence are now being scrutinized for any risk, including that associated with environmental contamination. So where does that leave us? The hardest thing about any market downturn is that no one ever knows if the worst is over or just how long things will last. One thing to watch is the CMBS market. The first impacts from the subprime mortgage turmoil were felt on the commercial real estate side in the CMBS sector, where activity fell a staggering 69% from the third to fourth quarter of 2007. A return to robust CMBS activity will be critical for the investment sector since banks have come to rely on the ability to securitize loans in order to lend at the high levels of the recent past. Until CMBS recovers, lending activity of the largest banks will continue to be more restrained than the levels the market enjoyed in 2006 and early 2007.
For now, the return of balance sheet lenders appears to be fueling transactions. Foreign investors, and other cash-heavy investors, are also quite active. Whenever market activity is down, it becomes much more critical to watch market barometers, stay abreast of shifting tides, stay close to existing clients and get where the action is. CommonGround provides an avenue for the industry to interact with each other, share ideas and hopefully weather the storm.