Specifically, the so-called BIG CRE Index fell to 80.58 in the first quarter of 2009 from 90.50 in the fourth quarter of 2008, a 10.9% decline, due to weakening economic conditions and an across-the-board deterioration in the retail, industrial, office and the multifamily markets. Lending conditions for community banks eroded a total of 19.4% from Banc Investment Group's baseline date of April 30, 2007.

GlobeSt.com: There are a lot of metrics out there that measure activity in the CRE community. How does this Index differentiate itself?

Nichols: We are capturing lending and risk. We don't measure sentiment for instance, which the Real Estate Roundtable's Index does. Also the focus is on community banks, which tend to be overlooked in surveys. We also look at the quantitative fundamentals of debt at the property level – we are one of the only comprehensive indexes that does that. That is very important and should be emphasized more: the ability for any given property to throw off a certain cash flow and that property's ability to continue to do so is important to understand on the individual level as well as the aggregate.

GlobeSt.com: How could this index be helpful to policy makers as they shape programs for commercial real estate?

Nichols: It's a good third party benchmark. It shows whether markets are deteriorating or improving and if so, how fast. It showed, for instance, the stark deterioration of retail from Q4 08 to Q1 09. A lot of people realized that without a benchmark of course. But the Index also showed that industrial properties dropped even further. Policymakers could see that and decide to shore up business manufacturing or devote other resources to this area.

[Editor's note: according to the Index the retail sector fell to 82.72, down 10.62% from 92.55 in the fourth quarter of 2008 and 20.08% from 103.50 in the second quarter of 2007. The industrial sector fell to 69.80, down 16.87% from 83.96 in the fourth quarter of 2008 and 31.51% from 101.91 in the second quarter of 2007.]

GlobeSt.com: Does the Index hold out any good possibilities for the near term?

Nichols: There is evidence that the commercial real estate market will not drop off a cliff in the way subprime market has. commercial real estate is still cash flowing, somewhat stable and there is some liquidity in the system. Government programs are actually helping.

GlobeSt.com: In the long run do you think community banks are going to permanently scale back their lending in commercial real estate?

Nichols: I think they will be more cautious and grow this activity more slowly. But commercial real estate is still among the most profitable business lines a bank can put on its books, so no, I don't see a permanent scale back. Also there is the argument that now is the time for many banks to expand since a lot of the risk has been taken out of the market.

Instant Insights /

Banc Investment Group's Chris Nichols

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