Tight Credit Seen as Bar To Revival in Real Estate

NEW YORK - Despite some signs that an economic recovery may be starting, the credit crunch in the U.S. real estate market is not easing and, indeed, real estate problems may still worsen, according to bank and real estate analysts.

"I don't see any terribly positive trends in real estate," said Carole Berger, who follows the banking industry for C.J. Lawrence, Morgan Grenfell. "There are no improvements in liquidity."

In previous real estate downturns, there were more funds to fuel recovery, with life insurers, thrifts, and foreigners remaining eager to finance new and old projects, the analysts said.

"The lack of liquidity in many parts of the real estate market is getting worse," said Raphael Soifer, analyst for Brown Brothers Harriman & Co.

Sourest Grapes in Northeast

Souring real estate loans have hurt banks all over the United States in the past two years, but especially in the Northeast, with commercial real estate hit harder than residential. Bank's nonperforming real estate loans are likely to climb for the rest of 1991, analysts said.

At this point in the cycle, big developers normally would sell to smaller ones financed by thrifts or life insurers, Mr. Soifer said. But these groups are "two of the biggest casualties of credit woes."

Foreign interest in U.S. real estate has dampened, and buyers are pickier, said William Walton, head of the general real estate group at Morgan Stanley Realty.

Less Room for Forebearance

Also, in previous real estate downturns, bank lenders exercised more forebearance.

"Banks are a lot less flexible now than they once were, with regulators now dictating much policy," Mr. Walton said.

Many loans wind up with the Federal Deposit Insurance Corp., the Resolution Trust Corp., or a lender on the brink of failure. These institutions do not care about relationships and do especially in the Northeast, with commercial real estate hit harder than residential. Bank's nonperforming real estate loans are likely to climb for the rest of 1991, analysts said.

As banks merge, there will be fewer lenders and less incentive for forebearance. They will clear the decks of bad loans and fire more real estate lenders.

"If regulators are there, a bank's incentive to work with a borrower is diminished," Ms. Berger said. "If a bank has to post a reserve and call the loan nonperforming, what gain is there in working with the borrowers?"

Cash Just Not Flowing

"The real problem is cash flows," she added. "As rents fall and vacancies rise, people can't service loans. Many buildings were built in the last five years to break even at rents not possible today."

"Banks are foreclosing quicker now. They realize the market won't turn around quickly," said Scott King, vice president at J.P. King, a nationwide real estate auctioneer.

"You have every lender and the Resolution Trust Corp. out there trying to market properties. So prices will continue to spiral down until demand absorbs the supply," Mr. King said.

"But not all banks are taking action to get rid of properties quickly once they have foreclosed," he said. "So it may take seven years to get rid of the overhang of residential condominiums. It may take three to five years to work through the oversupply of single-family homes."

Ms. Berger said there is a seven- to 10-year oversupply of commercial real estate properties all over the United States.

"Lenders toward the end of this cycle will own an enormous amount of real estate," Mr. King said. "They won't be able to work with the borrower as in the days of old. It makes me nervous to think about what they will own versus their capital."

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