Economist Slow growth for commercial development

A credit crisis "of Biblical proportions" is slowing commercial real estate lending and development nationally, adding to a difficult business environment for office furniture makers.

While Fifth Third Asset Management economist Mitch Stapley does not see commercial real estate experiencing anything like the residential meltdown, he told executives this morning to expect a slow period of new office construction for the next year or so, with perhaps a 2 percent to 5 percent decline nationwide and then a recovery in 2009.

"It's going to be soft," Stapley said following his address at the annual meeting of the Business and Institutional Furniture Manufacturers Association in Chicago that coincided with the third day of NeoCon.

"We're in for a slow growth period here, and the real question is bank capital and the access to bank capital," he said. "Funding for projects, certainly over the next year or year and a half, is probably going to be tough."

With bank lending standards for commercial real estate at the "tightest levels we've seen in over 20 years," projects that do get funded will find capital more expensive, he said.

Banks have pulled back lending as they rebuild their balance sheets in the wake of losses stemming from the collapse of the housing market and the sub-prime lending debacle, said Stapley, chief fixed income officer for Grand Rapids-based Fifth Third Asset Management Inc.

"It's going to be really difficult to see the banks loosening up to any great degree and getting the commercial real estate market going again," he said. "You just have a tremendous need for banks to rebuild their balance sheets. They have to take money on. They can't be as worried about lending money out."

Compared to the residential market, commercial real estate does show some strength with high occupancy rates and "pretty solid" rental incomes in major markets across the country, Stapley said. Commercial real estate also lacks a large oversupply of capacity to work off, he said.

"The market looks pretty balanced," he said. "Good projects should probably find a way to get funded, but it's going to be a slower period."

New office construction is a key economic driver for the office furniture industry, along with white-collar job growth, along with corporate profitability and business capital spending, the latter of which has shown signs of weakness.

After four straight quarters of solid growth, including two double-digit quarters in mid-2007, overall capital spending "fell off a cliff" in the first quarter of 2008, Stapley said, declining 2.5 percent. The buildings and structures category grew just 1.1 percent in the first quarter, which compares to 6.4 percent in the same period a year earlier.

Stapley offered his views as the office furniture industry faces a forecasted two-year moderate downturn. He believes the national economy is not yet in recession, after growing 1 percent in the first quarter, and that any economic downturn that occurs nationally will last just a quarter or two, though recovery will move slowly.

"We are teetering on the edge," he said, "but we're not there yet."

http://www.mlive.com/businessreview/western/index.ssf/2008/06/economist_slow

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Economist Slow growth for commercial development