Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, July 1, 1990 TAG: 9006290762
SECTION: BUSINESS PAGE: E1 EDITION: METRO
SOURCE: Mag Poff Business Writer
DATELINE: LENGTH: Long
That's because there'll also be fewer new companies and shops to fill any new buildings, again thanks to a diminishing appetite of lenders to fund such start-ups.
Amid growing concern that U.S. banks may constrict business by tightening their lending standards, Roanoke Valley companies say any evidence of a credit crunch is relatively mild compared with other parts of the country.
But area bankers and savings and loan officials, feeling the impacts of a slowing economy and stiffer regulations, said last week that the flow of money to valley businesses may soon slow.
Clearly, Roanoke area bankers have turned more cautious.
"We take a more conservative look at new credits," said David Caudill, president of Dominion Bankshares, "and ask can they be repaid in a decline."
Even if lenders don't admit to an actual credit crunch, they're sending signals of a gradual tightening of loan standards:
Bankers are refusing to lend for projects they consider too speculative. Real estate ventures such as unleased office buildings and shopping centers are considered too risky by some lenders. Speculative home builders also may be facing a shortage of money.
Lenders are turning down start-up loans and lines of credit for new businesses they judge as too thinly capitalized. In general, a borrower is expected to put more of his own money - rather than the bank's - at risk in a new venture.
And banks are putting more emphasis on a borrower's likelihood for future success as well as looking closely at his history of repaying past loans.
Even when a banker is prone to approve a commercial loan or credit line, he's likely to ask more questions and document loans more closely, said Crestar Bank's regional president, Edward Harris.
"We follow up" on documenting new loans, Harris said.
The change in underwriting standards, especially for real estate development, has been subtle, according to Carson Quarles, regional president of Central Fidelity Bank.
The differences are a matter of degree and are intangible, he said, but lenders want more cash up front or evidence that a larger portion of a proposed building will be leased in advance of construction.
Quarles said it's getting harder to find borrowers who meet new federal criteria, which in turn is creating problems of credit availability.
"The deal has to stand on its own, right at the front end," Quarles said. In the past, bankers gave a project time to develop.
Quarles said bankers now must have evidence of sufficient pre-leasing to support the project from day one and "cash must be injected into the deal."
First Virginia Bank-Southwest seeks the same solid borrowers with proposals that make economic sense, said president James Hinson. To him, elimination of speculative projects caused by the credit crunch is healthy for the building industry, Hinson said.
Generally, banks have plenty of money to lend, according to C.G. Holthus, president of the American Bankers Association.
Banks look more closely at credit quality because of a tighter economy, he said in an interview. The degree of credit restrictions, he said, varies with the section of the country.
Holthus spoke last week at a meeting of the Virginia Bankers Association at The Homestead in Hot Springs.
Bankers said the shifts in loan criteria are in reaction to a changing economic climate coupled with new standards imposed on banks and thrift institutions by federal regulators.
The latter is the most tangible and obvious explanation for the changes. Gauging the economy has proven an inexact science.
The huge bailout of the savings and loan industry has forced stiffer examination of loan portfolios of all financial institutions, especially lending for real estate ventures.
As an example, regulators have classified current loans as non-performing if a developer is supplying cash from other sources. Projects are required to generate their own cash flow.
Thrifts are trying to shift some of their loans to banks - or retire them early - because of new limits on the amount of capital they can lend to any one developer.
Ronald Dietz, president of Roanoke's CorEast Savings Bank, said that limit is even tougher to meet because new federal standards have lowered the amount that thrifts can use for lending capital.
They are asking larger developers to cover unsecured lines and increase collateral, said Dietz, whose office is in Richmond. The result of these new rules is to reduce money available for real estate deals and small businesses.
Federal Reserve Board chairman Alan Greenspan, in testimony last week before the Senate Banking Committee, blamed the current credit restrictions on lax standards during the 1980s.
"We are going from lending standards that were clearly more lax than they should have been, back to a sound and more normal one," Greenspan said.
"The overbuilding was supported in part by the ready availability of credit from thrifts and banks, that, in hindsight, partly reflected lax lending standards and unfortunately insufficient attention by supervisors," he said.
Greenspan, however, predicted "continued modest economic growth" and said that "enough credit appears to be available to fuel this growth."
But the Senate committee hearing was prompted by complaints from U.S. companies hit with the more restrictive standards.
"We are hearing almost every hour from businessmen who are having trouble getting loans," said Sen. Christopher Dodd, a Democrat from Connecticut.
In Western Virginia, the situation apparently hasn't gotten quite that tight, despite the signs of greater caution.
Edwin Hall of Hall Associates in Roanoke said the credit crunch is real for speculative projects.
He said builders must provide proper appraisals, financial strength and leases for 60 to 70 percent of a structure.
George Bristol, western regional director for Associated General Contractors of Virginia, said his members are concerned about the credit situation, although it is still hard to pin down.
He said there has been a drop-off in negotiated contracting work from private developers in the last two to three months.
Bristol said he could not determine whether the decline is the result of a lack of bank financing or simply lower demand because of the economy.
David Reemsnyder, president of Snyder & Hunt, a real estate developer in Blacksburg, said the supply of development capital is restricted although money is available for "good, strong deals."
He attributed the problem to more stringent real estate lending standards imposed by federal regulators. Higher standards "are good for our industry long-term," Reemsnyder said.
He hasn't heard of any developer in financial trouble that can be attributed to tighter lending.
Steve Aud, vice president of Branch & Associates, a Roanoke construction company, said his company hasn't felt a pinch. Nor is he aware of a credit crunch here.
Aud has heard of tightening credit in the urban corridor between Washington and Hampton Roads. He's also heard talk that architects' work loads are beginning to taper off.
"They are the first to feel it. The potential [for a downturn] is there."
But not at Sherertz, Franklin, Crawford, Shaffner of Roanoke. Ronald Crawford, a partner in the architectural and engineering firm, said most of his work involves projects with a proven need that doesn't disappear in a slow economy, such as hospital construction. Crawford said, however, that a demand from lenders for greater documentation is delaying construction projects. And that makes building more expensive.
Len Boone of Boone & Co., a Roanoke real estate sales and development firm, said banks are interested in good, viable projects but also demand more equity invested by developers or more pre-leasing of space to be built.
"It's a change in guidelines, not a credit crunch," he said. Both banks and developers are more cautious than they would be in an expanding economy, Boone said.
There may be a credit crunch, said Richard Whitney, but Fralin & Waldron hasn't tried to borrow recently.
Whitney, executive vice president of the Roanoke development company, said there's a crunch nationwide and statewide. The signs of a crunch he sees in Roanoke where business people are cutting back inventory and postponing projects.
He attributed the stiffer lending requirements to the slower economy.
Under standards now requiring that some projects be 85 percent leased before construction starts, there are many successful projects in the valley that could not be undertaken in today's lending environment, said Roanoke developer T.D. Steele.
So far, area retailers say they've been spared from the tightening of credit. Stores depend on banks for continuing lines of credit in order to purchase inventories of merchandise.
Richard Lynn, president of Heironimus, said the Roanoke-based department store chain has had no problem borrowing, "but we're financially sound." Nor has he heard of any other Roanoke merchant in difficulty.
The only problem in the retail industry locally is nervousness of New York suppliers about being paid in light of the failure of some national chains, Lynn said.
Jane Bonomo, who owns a chain of women's apparel shops in the Roanoke and New River valleys, said she's always been "risk-averse." Bonomo said she buys entirely from store revenues: "I don't finance anything, I have no receivables, I don't borrow. I play it safe."
Bonomo said she knows of no local merchants who can't get credit. The fact that some national clothing chains have financial problems, she said, is a boost to her Bonomo's shops.
Marc Fink agreed that there's no local talk about retailers in a credit crunch.
He said Fink's Jewelers has "absolutely no problems. We have an excellent banking relationship."
The question remains, however, whether the Roanoke area will remain relatively immune to the economic and credit pressures already affecting other areas of the country.
There may, indeed, be more impacts to come with shifts in the economy.
For example, Caudill of Dominion Bankshares said some "under-capitalized companies worked their way into the marketplace" during the long eight-year cycle of prosperity.
Now that the nation's economic growth rate has slowed to just 2 percent a year, there's a shakeout of weaker businesses along with fear of higher inflation rates, he said.
And bankers must view loan applications in the context of a potential downturn, Caudill said.
For the real estate industry, the crunch will last until overbuilt real estate projects have been absorbed, Hall said.
Buildings in downtown Roanoke and suburban office parks in the north and south county areas need tenants, he said.
And provided no new buildings are added in the next year or two, those vacancies will be absorbed, he said.
Even though there is new building already under way - most notably the downtown Dominion Tower - Hall looks for bankers' skittishness to help restrain development.
The credit crunch will take care of that problem, Hall said.
The New York Times contributed to this article.
by CNB