TENANT NEEDED: The former Harrah’s office building, behind the Dixon Gallery and Gardens in East Memphis, sits vacant. -- PHOTO BY LANCE MURPHEY

Rick Wood, senior vice president for Financial Federal Savings Bank, recently gave a speech about the drastic decline in institutional lending for commercial real estate loans.

In the graph Wood compiled for his presentation, one line in particular stood out – the one that tracks lending from capital markets. While that funding source experienced a huge upswing in the mid-2000s, it plummeted in 2008, revealing a dire slowdown in lending dollars for commercial real estate loans.

“It’s pretty dramatic in terms of where we are today with the availability of lending sources to make anything work,” Wood said. “It was so beautiful for so long.”

The beauty of the commercial lending market clearly has been sullied by a lack of financing, most notably from the capital markets, which saw a nationwide decline from $230 billion in lending near the end of 2007 to $8 billion now.

That dearth of lending sources has translated to Memphis, which saw its lowest commercial mortgage total in years, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

For the past 12 months (November 2008 through October 2009), local banks and mortgage companies made just 255 commercial mortgages, a 41 percent dropoff from 432 commercial mortgages during the previous 12-month period. (Data for this article include only mortgages taken at the time of sale, not refinances.)

Also, mortgages have averaged just $661,452, down 44.9 percent from $1.2 million, while the total sales volume of $168.7 million was down 67 percent from $518.8 million for the previous period.

HERE TO SHOP: The Mendenhall Commons shopping center at 540 S. Mendenhall Road is bustling with activity. -- PHOTO BY LANCE MURPHEY

The top lender during the past 12 months was First Tennessee Bank NA, which made 40 commercial mortgages that averaged $558,163 and totaled $12.8 million. It was followed by Regions Bank, doing business as Regions Mortgage (14, $804,161, $11.3 million) and GMAC Mortgage Corp. (two, $5 million, $10.1 million).

The biggest issue for businesses looking to borrow money, whether it’s to expand or relocate, has been the availability of capital. And companies that don’t have enough equity – sometimes up to 40 percent – likely won’t get the loan.

Jon Albright, president of the Memphis Area Association of Realtors and partner at Investec Realty Services LLC, said uncertainty is swirling throughout the commercial market. That’s decidedly different from its residential counterpart, which has seen an upswing of late as prices stabilize and consumers regain confidence in buying homes.

It all comes down to one giant hurdle facing the commercial market.

“Lack of acceptable financing is a real challenge, not only what we’ve seen this year, but probably what’s going to happen in 2010,” Albright said. “People have to have more comfort and confidence in the economy for a lot of the different commercial sectors to get healthier.”

A growing confidence in the economy will impact demand. Increased demand will help businesses flourish. Prospering companies will expand their operations and fuel the need for additional real estate needs.

Whether or not that happens remains to be seen.

“If the lenders can continue to be active as lending sources at any level, that helps the liquidity in the marketplace,” Wood said. “But the scrutiny of all product types in underwriting the operations of the property and the rent roll is going to dictate the future of real estate activity going into 2010.”