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April 1, 2005

Real Estate Bubble Exists, Say Half of Lenders in Phoenix Lending Survey

PHILADELPHIA (March 31, 2005) Nearly half of lenders nationwide believe there is a real estate bubble, according to the results of this quarter’s Phoenix Management “Lending Climate in America” Survey. Forty-six percent of the 122 commercial lenders who completed the quarterly economic survey said there is a significant overvaluation in the real estate market.

“Belief in the existence of a real estate bubble appears to be gaining some momentum,” said E. Talbot (Tal) Briddell, Managing Director of Phoenix Management Services. “More lenders believe the real estate market is significantly overvalued than did so the last time we asked about it.

“What is less clear to lenders, though, is how damaging a real estate bubble is to the health of the U.S. economy. When we asked the group who thought a bubble existed how worried they were about it, 91 percent said they were only mildly concerned about its impact on the economy.”

Thirty-nine percent of lenders said they did not believe a real estate bubble existed. Fifteen percent said they were unsure.

Lenders were split 60 / 40 on the likelihood that the economy would slip back into a recession this year. Sixty percent said it was “not at all likely,” while 39 percent said it was “somewhat likely.” When asked which single issue concerned them most in its ability to undermine the economy, 40 percent of lenders named the budget deficit. Eighteen percent selected the trade deficit; fifteen percent named the war in Iraq. Twelve percent said the sluggish job market worried them the most, and seven percent selected the low household savings rate.

Lenders predicted the economy would perform at a C+ grade for the remainder of this year.

For the first quarter in the last eighteen months, lenders’ expectations for domestic loan demand increased. Forty-three percent expect corporate lending demand to rise, up from 32 percent last quarter. Sixty-two percent said demand for middle market loans would rise (up from 56 percent last quarter), and 64 percent said small business lending would increase (up from 56 percent last quarter).

Less than a quarter of lenders predict any significant expansion plans by their customers in the next six to12 months. Twenty-four percent said their customers planned to make new capital investments, 17 percent said their customers planned to hire new employees, and 16 percent, each, said their customers planned to raise additional capital or make an acquisition.

Fourteen percent said their customers would introduce a new product or service. Thirteen percent said their customers would enter new markets.

For the third quarter in a row, lenders reported lower growth expectations for their customers. Only 13 percent said their customers expected strong growth in the coming six to 12 months, down from 21 percent who said the same six months ago. Eighty-two percent of lenders said their customers anticipated moderate growth, the same percentage as last quarter.

“The true litmus test of a full economic rebound will be when lenders report aggressive growth and expansion plans by their customers,” Briddell said. “We’re not there yet.”

When asked which industries were the most attractive to their lending institution, lenders named the same three that have topped the list for more than two years—Service Companies (70 percent), Light Manufacturing (69 percent), and Industrial Distribution (66 percent). Health Care was named by only 36 percent as an attractive industry, but that number was a significant jump from the 24 percent who said the same last quarter.

Start-ups/New Ventures were deemed the least attractive industry to lend to, with 60 percent naming it unattractive.

Most lenders reported plans to maintain their existing loan structures, although there was an increase in the percentage of lenders with loans in the $1 million to $10 million size who said they planned to tighten their current loan structures.

A majority of lenders also reported plans to maintain their interest rate spread and fee structures on similar credit quality loans, but 21 percent, averaged across all size loans, said their institution planned to increase them.

Nearly all lenders expect the Fed to raise rates in the coming six months, with most predicting a half-point hike.

About the Survey

The Phoenix Management  ”Lending Climate in America” Survey is conducted quarterly to gauge shifts in lenders’ attitudes toward the economy. 122 lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed a written questionnaire during February.

About Phoenix Management Services

Phoenix Management Services is an operationally-focused advisory firm, providing turnaround, crisis and interim management and investment banking services to middle market companies in transition. Since 1985, Phoenix has aggressively advocated on behalf of its clients in over 700 assignments nationwide across a variety of situations and industries. With offices in Philadelphia, New York, Boston and Ft. Lauderdale, Phoenix preserves and enhances the value of its clients’ companies by focusing on the operational and financial challenges they encounter.

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