Grubb & Ellis Chief Economist Predicts 40 Percent Drop in CRE Transaction Volume

In an exclusive interview, Grubb & Ellis chief economist Bob Bach told CPN that his firm is predicting a 40 percent decline in commercial real estate transaction volume this year compared to 2007.  A big reason for the prediction is a survey of lending officers at large banks, done by the Federal Reserve and released in January. The survey notes that 80.3 percent of such loan officers are tightening their lending requirements, a figure unequaled in nearly 20 years.  The credit crunch “really does show up in fourth-quarter sales being down,” Bach said. According to Real Capital Analytics’ figures, the fourth quarter of 2007 saw $82 billion in CRE sales, versus $102 billion in the same quarter a year earlier. “It’s really quite a dropoff,” Bach commented, “clearly the worst at least since the early ’90s.”  Besides the tightening of loan terms over the past six months or so, Bach’s estimate about CRE transaction volume rests on factors such as uncertainty about pricing and concerns about the slowdown in the economy, including its possible effects on net operating income.  The credit tightening is not an overreaction, Bach said. “There’s still some rationality in the market… There’s just a lot of fear out there right now,” affecting the entire credit market, “and CRE has gotten caught up in that.”  One aspect of the subprime situation’s fallout is that “We’ve underestimated it so far,” said Bach, recalling last August, when some commentators were predicting that everything would blow over by Labor Day.  “The problem,” Bach said, “is this could be a feedback loop” connecting mortgage defaults, the overall economy and unemployment. He also points out that the economy saw an “extended jobless recovery” following each of the last two recessions.  Fueling the ongoing concerns about the ripples from the subprime mortgage meltdown is a front-page story in today’s New York Times headlined “Mortgage Crisis Spreads Past Subprime Loans.”  The article notes that rising adjustable-rate residential mortgage payments are starting to hike monthly payments out of the reach of even some prime borrowers, while falling home prices make it hard for them to sell and get out from under. Citing figures from the Mortgage Bankers Association, the article reports that nearly 4 percent of prime residential mortgages were past due or in foreclosure at the end of September. And the overall residential-mortgage delinquency and foreclosure rate is 7.3 percent, the highest since the MBA started tracking it in 1979.  And the article notes though these numbers significantly lag the subprime residential default rate of about 24 percent, other numbers add to the concern about the overall economy. The default rate on home equity lines of credit, for example, rose from 4.5 percent at the end of 2006 to about 5.7 percent at the end of 2007. Defaults on car loans are creeping up too, as are personal bankruptcies.  Still, Bach wants to keep the situation in perspective: “When the fear is at its peak, that’s when you can make money,” he said.