Bankers Eagerly Return to Commercial Real Estate Market
Robert Burgess and Michael Smith Bloomberg News, THE JOURNAL RECORD
NEW YORK -- For an example of how far the U.S. real estate market has come back from the crash of the early 1990s, look no farther than New York developer Douglas Durst.
The response from bankers was universal in 1994 when Durst first tried to get a loan to build a 48-story office building in Manhattan's Times Square. Was he kidding?
Now, Durst can't keep the banks away. In April, eight lenders lined up offering to provide the developer a $340 million construction loan for the project, the city's biggest development in more than a decade. Bank of New York Co. won the assignment. "I couldn't have gotten this loan a year ago," said Durst. Buoyed by a thriving economy, U.S. banks are financing offices, apartments and other commercial real estate property at a pace unseen since the 1980s. Banks had about $316 billion in real estate loans on their books at the end of 1996, up from $299 billion a year earlier, according to Federal Deposit Insurance Corp. In 1991, when heavy losses cost Citicorp and other banks billions, outstanding real estate loans totaled $283 billion. Developers and investors have used this cash to push property values to their highest level in six years and to finance a wave of new construction. "If you're a developer not getting money today, you're not trying hard enough," said John Levy, head of John B. Levy & Co., a Richmond, Va.-based investment bank that specializes in bringing developers and lenders together. There are signs some banks are falling into the same patterns that got them into trouble in the early 1990s. Competition is so fierce that developers demand, and receive, longer repayment schedules, lower down-payment requirements, no call provisions and other perks they haven't enjoyed since the boom of the 1980s. The spread above benchmark interest rates on a typical loan to the healthiest real estate companies -- a key gauge of profit -- has dropped by half in the last three years. "It's insanity," said Joseph Luick, head of real estate for Teachers Insurance and Annuity Association-College Retirement Equities Fund, whose $20 billion mortgage portfolio makes it one of the country's biggest real estate lenders. Among the most active real estate lenders are Fleet Financial Group Inc., NationsBank Corp., Bank of New York Co., First Union Corp. and BankAmerica Corp., as well as investment banks Nomura Securities, Lehman Brothers Holding Inc. and Goldman, Sachs & Co. Daiwa Finance Group and Legg Mason Mortgage Capital Corp. have teamed up in a venture that offers up to 100 percent financing for certain properties. The program is so popular that the venture has already lent more than $400 million since it was formed in February. Another $200 million in loans is in the works. "The world is so much better for developers now," said Adam Metz, chief financial officer of Urban Shopping Centers Inc. Metz's company just convinced Lehman Brothers Inc. to shave a full percentage point off its interest rate when refinancing $170 million in debt on the Water Tower Place office and retail complex on Chicago's Michigan Avenue. It's easy to see why banks like real estate. A strong economy is spurring companies to add more workers and lease more space to meet increased demand for goods and services. Property values are at their highest level since 1991, according to National Real Estate Index, and a miniboom in construction is under way in areas such as Atlanta, North Carolina, Los Angeles, Phoenix and Las Vegas. …