BOSTON (Dow Jones) -- Shares of real estate investment trusts traded lower Tuesday on predictions of slower construction spending and a Federal Reserve survey that estimated about 80% of banks tightened lending standards for commercial real estate loans in the latest quarter.
The news heightened fears that commercial real estate is poised to follow the deep slump in residential housing. Home prices in many areas of the country have pulled back after a multiyear boom, while the crisis in subprime mortgages and recession worries have battered confidence.
The commercial real estate market, however, has so far largely avoided the serious problems plaguing U.S. residential, but that may change as banks get stingier with loans.
More than 80% of banks -- the largest percentage ever -- said they had tightened lending standards for commercial real estate loans in response to a weaker economy, the Fed reported Monday. Nearly 60% of the banks reported falling demand for commercial real estate loans, and 87% expect the quality of such loans already made to worsen.
"A particularly dramatic change is likely to occur in commercial construction, which is a key segment of business investment," said Richmond Fed President Jeffrey Lacker in a speech Tuesday.
"Construction spending for new stores and offices grew by a healthy 10% after inflation last year, but we have heard reports from our district contacts of a significant softening of conditions lately, with major projects being deferred or cancelled outright," Lacker said. "In addition, vacancy rates for retail space have increased over the last year, which should lead to less construction."
After several years of beating the stock market, REIT shares corrected last year. REITs are public companies that own and operate portfolios of commercial real estate such as offices, apartments, malls and industrial distribution facilities. An exchange-traded fund following the sector, Dow Jones Wilshire REIT ETF (RWR), is off 24% over the past year as a string of high-profile M&A deals finally slowed and investors locked in earlier gains.
The underperformance of REITs is "due to negative investor sentiment and fears of potential asset value declines," wrote Bear Stearns in a Jan. 28 fourth- quarter earnings preview.
"Fundamentals remain solid, but we think 2008 guidance will incorporate some moderation," the analysts wrote. "While our models factor in moderating numbers, the rising cost of capital, development pipeline sustainability and refinancing risks will likely be an important focus as we move into the coming year."
"We believe this year will be another challenging year for U.S. commercial real estate and REITs," added analysts at Goldman Sachs in their 2008 outlook. They pointed to headwinds such as weakening property fundamentals, rising cap rates and limited liquidity as a result of conditions in the credit market.
The analysts forecast losses between 10% and 15% this year for REIT stocks. The broad sector was down more than 2% in afternoon trading Tuesday.
(END) Dow Jones Newswires 02-06-08 0424ET Copyright (c) 2008 Dow Jones & Company, Inc.
