Tight Credit and Slack Demand Put Squeeze on Some US Builders
LARGE construction firms and small contractors across the United States are feeling the effects of a credit crunch, and the Senate Banking Committee has scheduled a hearing today in response to their cries for relief. Federal Reserve Board Chairman Alan Greenspan, Federal Deposit Insurance Company Chairman William Seidman and US Comptroller of the Currency Robert Clarke have been asked to address the credit issue.
``There are a lot of people who would like to see interest rates lower and credit eased,'' says Brookings Institution economist Alice Rivlin, a former director of the Congressional Budget Office.
Among those who are complaining about credit conditions is Irvin Maizlish, president of the International Council of Shopping Centers. He is also scheduled to testify at today's hearing.
``The money has dried up for the shopping center industry,'' Mr. Maizlish says. He argues that, due to the savings-and-loan crisis, national banks are experiencing more rigid examinations. Their more-cautious and restrictive postures have led to a 25 percent drop in financing for shopping center construction during the first quarter of 1990.
But Paul Kasriel, an economist with Northern Trust Company in Chicago, says the credit pinch is due more to real-estate doldrums than tight monetary policy.
``Big inventories for unsold new houses through April have been rising, and office vacancies are rising, generally, across the US. There doesn't seem to be a big demand out there,'' he says. Maizlish acknowledges that ``there have been bad deals by banks on real estate lending, but there have been hardly any foreclosures on shopping centers,'' who he says are ``excellent borrowers. We hope the Banking Committee will talk to regulators and encourage them to evaluate us separately.''
Ms. Rivlin says that Maizlish's concerns are ``a symptom that people are hurting, and I'm not surprised that major borrowers are saying `help!''' But ``credit is credit; everyone is dipping into the same pool,'' she says, referring to Maizlish's interest in being classified differently from higher-risk borrowers. ``I don't see any way to ration credit favorably.''
For the past two quarters, real gross national product growth (two thirds of which is consumer spending) was less than 1.5 percent, almost half a percent lower than Chairman Greenspan's annual growth target, observes Mr. Kasriel, a former Fed economist.
Kasriel says he expects Greenspan to lower interest rates after the first week in July, when the Federal Open Market Committee meets and the June employment data are published.
Meanwhile, the credit contraction is affecting the construction industry and related contractors, such as glass workers and bricklayers. ``It's becoming more acute,'' says Paul Ciminelli, vice president of The Ciminelli Companies, Inc., a large locally owned and operated construction firm just outside Buffalo, N.Y.
Mr. Ciminelli attributes the contraction to several causes. The savings-and-loan crisis has forced a sense of reality among developers, he says. ``You can't pick up a newspaper anymore without reading about the S&L crisis and how much it's going to cost everyone in the country,'' he says.
Overbuilding in the latter 1970s and throughout the past decade has saturated the residential, commercial, and retail markets. The result is that banks are a lot more conservative, basing their loans on more than a client's proven creditworthiness, he says.
``Even with a good track record, companies now have trouble getting loans unless they have pre-leasing or pre-sales for a particular project. Risk and speculative building is going to be a thing of the past,'' he says.
Mr. Ciminelli says he expects his firm to offset the loss of this business by ``building to suit'' - that is, building a project for a specific user. ``With this, the bank looks at the financial strength of the client, who will either occupy the building or purchase it directly from us.'' In 1989, all of Ciminelli's projects were built on speculation. This year, 50 percent will be ``built to suit.''
``In the future, development is going to be more demand driven and not building for the sake of building,'' he says. ``The projects we will do, and those we will compete against, will make economic sense, as opposed to those [highly speculative investments] in 1988.''