For at least a year-and-a-half, there has been considerable discussion
and concern about a credit crunch in the U.S. economy. According to
much of the commentary, lack of credit has particularly plagued the
real estate industry, especially commercial real estate, and small
business has reportedly been affected as well. I will not go into
all dimensions of the issue here, but it does seem worthwhile to add
perspective to the credit and real estate situation.
While concern about credit availability is no doubt real, evidence
of the credit crunch phenomenon is not easy to come by. And there
are those, both in banking and in business, who feel that the problem
has been exaggerated if, indeed, a crunch exists at all.
A cursory look at some evidence for banks intimates that the credit
crunch is an illusion. For example, commercial bank asset portfolios
have continued to expand in recent years at rates comparable to
relevant historical experience. This performance does not suggest
that there were unusual credit restrictions in place immediately
preceding or during the recent recession, at least in relation to
previous economic contractions. Rhetoric about the credit crunch
notwithstanding, it is hard to detect in the commercial banking
A very different conclusion is reached, however, upon examination
of data for the savings and loan industry. There, it is clear that
S&Ls curtailed their lending significantly, and atypically,
beginning in 1989 and continuing through mid-1991. It is evident
that the contraction is much sharper and more prolonged than during
the serious 1981-82 recession. This recent pattern is hardly surprising,
given the severity of the problems in the savings industry and the
demise of so many institutions. While not surprising, it nevertheless
may constitute a reasonable, and rather obvious, description of
the credit crunch.
Is this all there is to the credit crunch then? Problems with
savings and loans have forced them to curtail their activities,
and the affected customers, principally real estate developers,
have been unable to secure alternate financing in a timely way?
While this chain of events has undoubtedly played out, I do not
find it an adequate explanation of recent experience. Something
more fundamental is going on, and the credit crunch is a symptom,
not the cause, of what we observe.
Essentially, we confront a serious inventory problem in real estate
in many parts of the country. Evidence of the inventory overhang abounds.
Nationwide, office vacancy rates are about 20 percent on average in major
metropolitan areas. Moreover, it is widely recognized that there is a
glut of retail, hotel and other space in many locations. And the number
of vacant residential units in the country is presently the highest in
at least 30 years. Is it any wonder that it is difficult to obtain financing
for real estate projects? Indeed, isn't it appropriate that lending to
real estate is constrained?
This argument says that it is excess space, and the attendant
decline in values, that fundamentally has hampered real estate development
and lending. Put another way, terms and conditions may well have
tightened in real estate finance, and more deals may be being rejected
than formerly, but this would seem appropriate in many circumstances
given current conditions as well as near-term prospects. In many
locations, there is simply no demand for additional commercial real
Another dimension of the environment, namely the state of capacity
and competition in the financial services industry, also suggests
that the heart of the real estate problem is oversupply rather than
lack of credit. We know that competition is keen among financial
firmsdomestic and foreign banks, and non-bank providers as
welland capacity is plentiful. Given this situation, it is
hard to believe that most viable projects will not find financing.
The fundamental problem is conditions in the real estate market
itselfconditions that render many projects uneconomicrather
than a generalized lack of financing.
Of course transitions can be costly and time consuming, and many
developers who formerly relied on savings and loans for financing
may have had difficulty obtaining replacements. But it is likely
that this difficulty stems from the real estate market and the prospects
for future projects rather than from excessive stringency on the
part of the lenders.