Banks Brace for Real Estate Downturn in Wake of Technology Stock Volatility

By Mandaro, Laura | American Banker, May 17, 2000 | Go to article overview

Banks Brace for Real Estate Downturn in Wake of Technology Stock Volatility


Mandaro, Laura, American Banker


With memories of the recession and real estate bust of the early 1990s in mind, bankers and analysts are warily monitoring a boom in real estate lending and looking to technology stocks as a possible harbinger of an eventual downturn. Fueled by the rapid expansion of Internet companies and the stock market wealth they have created, housing and commercial real estate prices in several markets, particularly in California, have been on the rise for the last several years. Bank lenders who specialize in commercial and residential real estate said there are only the slightest hints that the growth is abating. Even so, volatility in tech stocks, whose surging prices fueled explosive growth of real estate values in areas like San Francisco and Silicon Valley, has sent shivers through the local community, banks that finance development, and analysts whose job it is to catch signs of credit problems. A heightened perception that the real estate market could bubble out of control has led some to counsel caution. "The crucial question is: What is the sensitivity of the local real estate market and labor market to the volatility of the Nasdaq?" said John Krainer, an economist at the Federal Reserve Bank of San Francisco. Banks in the region rely heavily on real estate lending, with community banks in the state among the most active in the business, analysts said. Campbell Chaney, an analyst at Sutro & Co., estimates that 20% to 25% of the loans made by California banks go toward residential and commercial real estate. He also estimates that between 40% to 50% of banks' total loan portfolios are secured using real estate as collateral. Out-of-state institutions, like Washington Mutual Inc., are also exposed, analysts said. Close to 100% of the entire portfolio of Seattle-based Wamu is in residential, commercial real estate or manufactured housing, and over of a third of its business is in California, said analyst James Bradshaw of D.A. Davidson. Some bank lenders are moving to protect themselves. Paul Nakae, a senior vice president in construction lending at Bank of the West in San Francisco, said he has been more careful when considering financing a commercial project that will rent to Internet companies. Some of that extra consideration translates into requiring a heftier down payment from the borrower. For one large office project in San Mateo County, where many tech companies have their headquarters, a project developer is contributing $100 million in equity, or 30%, of a project that will cost $350 million. …

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Banks Brace for Real Estate Downturn in Wake of Technology Stock Volatility
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