WASHINGTON -- Businesses have splurged on new warehouses, office buildings, hotels and other commercial real estate in the past several years, helping keep the economy afloat as the housing market has plummeted.
Even before worldwide credit markets started seizing up in the past month, however, there were signs that the commercial real estate boom was hitting some speed bumps. Lenders have been tightening standards for real estate loans, while reporting that more developers are falling behind on loan payments.
So far, the troubles haven't filtered out in a major way into the construction industry. Spending on private, non-residential real estate projects jumped 17% in the past year alone. Architects and contractors, however, are keeping a keen eye out for signs the credit crunch is spreading through the real estate sector.
"It's a big risk," says Tim Yeager, professor at the University of Arkansas Sam M. Walton College of Business, who developed a model to help banks measure potential hazard in their real estate portfolios.
"Construction and development loans and commercial real estate lending in general are going to slow way down," Yeager says. "Some banks are in trouble. That doesn't necessarily mean they're going to fail, but management is being replaced."
U.S. banks and thrifts reported a 40% rise in past-due construction and development loans in the second quarter of 2007, the Federal Deposit Insurance Corp. said last week. About a quarter of the 52 domestic banks that participated in a separate Fed survey said they had recently set tougher standards for making commercial real estate loans.
Federal regulators last year tightened guidelines for commercial real estate lending -- including loans for condos or housing developments -- saying many banks were becoming overconcentrated in the sector.
"There have been a few anecdotes that (tighter credit) has rolled over into the non-residential market," says Kermit Baker, chief economist for the American Institute of Architects, including reports that some localities are having trouble finding buyers for construction bonds.
But architecture firms, which are often the first to lose work when real estate slows, are going strong. The AIA's July architecture billings index, which forecasts construction activity months ahead, hit the second-highest level since the group starting keeping records in 1995.
The Associated General Contractors of America this month asked its members whether troubles in the financial markets were affecting demand or financing. Many said work was holding up, with banks tripping over themselves to lend money. Others said loans were being held up as lenders reworked pricing and risk-analysis models.