Commercial real estate lending begins to awaken from deep sleep.

The Los Angeles County commercial real estate lending market seems to be slowly waking from its troubled sleep, according to statistics compiled by TRW-REDI Property Data West, a division of TRW Inc.

TRW-REDI's figures -- which track loans for real estate purchases, refinancing and construction -- indicate the aggregate dollar volume of $2 million-plus commercial real estate loans made between January and October of 1994 increased 13.4 percent over the like period of 1993 (see accompanying chart). Specifically, the aggregate loan volume increased from $3 billion in 1993 to about $3.4 billion in 1994.

Despite this promising signal of improvement, Southern California industry observers said they aren't ready to don rose-colored glasses. Phenomenal real estate rebounds in other markets, such as Phoenix and Denver, are a far cry from the more modest improvements in the L.A. County market.

"It's a very mixed picture," said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. "Even though there are definite signs of recovery, and we're projecting more growth through the next year, the term 'recovery' just doesn't mean what it used to (in this region.)"

Most loans for refinancing

Commercial loan refinancing comprised the bulk of L.A.'s loan activity in the first 10 months of 1994, with the dollar volume of that type of lending increasing 22 percent from the like period of 1993 (see accompanying chart). Commercial refinance loans of $2 million or more in the county rose from about $1.89 billion in the 1993 period to $2.3 billion in the 1994 period, TRW-REDI reported. However, the 416 refinance loans issued in L.A. County during the 1994 period fell just short of the 423 such loans issued in the 1993 period.

According to Thomas D. Leahy, BankAmerica Corp. vice president and division manager for real estate in Los Angeles, the bottoming out of interest rates during the first half of 1994, combined with a general perception of an improved Southern California economy, spurred on an active refinance market.

"People with existing active properties wanted to take advantage of the low interest rates," he said.

TRW-REDI market analyst Nima Nattagh agreed with Leahy, adding, "The refinance market is still going strong. This increase shows that lenders are definitely taking the view that the market is improving, and they're willing to refinance existing loans."

Even though loan restructuring made more sense in 1994 than it had in previous years, some industry observers said that surge of refinancing may begin to ebb as interest rates continue to rise.

Insurance/pension funds investing

TRW-REDI's data also showed that major life insurance and pension funds are again entering the commercial real estate arena after a long hiatus. While 1993 figures showed only three insurance/pension outfits on the top 20 list of lenders, that top 20 list includes five such outfits this year.

The re-entry of pension funds and insurance companies reflects a trend of wealthy investors in general returning to real estate, explained USC associate professor Dale Johnson, who is in charge of the university's real estate curriculum. "Many people got burned in the eighties. Now that time has passed and asset values have fallen, many investors are arguing it's time to shift gears, shed financial assets and get into real estate assets."

George A. Smith, chairman of the mortgage banking firm George Smith Partners Inc., said this is good news because new lenders, particularly pension funds that in the past haven't done any mortgage lending, are looking to California. Smith also pointed out Wall Street began securitizing commercial mortgages about four years ago. This securitization increases the liquidity of commercial mortgages, making them more attractive to investors.

"Although this is more expensive than conventional lending," Smith explained, "it has liquefied the commercial mortgage market, thereby bringing new lenders into the market. ... From this, some very creative structures are evolving."

It also helps, observers agreed, that there will continue to be more confidence in commercial real estate lending because there's a feeling among many investors and lenders alike that properties have finally been devalued to fair market value. And when the property values are correct, lenders feel more comfortable about making loans.

Too much money?

But Smith also raised the concern that, with all this capital being placed in these markets, if lenders aren't careful, there may be too much money chasing too few reasonable deals -- particularly in L.A. County where vacancy rates are still too high for comfort and where a lot of areas are still overbuilt.

"Now it's a question of finding good properties at good occupancies and rents that truly reflect today's values, and where the supply and demand in that sub-market is strong," Smith explained.

The aggregate dollar volume of construction loans dropped 6 percent in the first 10 months of 1994, compared with the like period of 1993, according to TRW-REDI, which didn't surprise industry observers, considering the soft commercial real estate market. But Nattagh pointed out this wasn't so ominous, considering that in the recent past, construction loans have dropped off as much as 50 percent.

And even though lenders may not be funding new construction, they are funding face-lifts for existing structures, particularly in the retail arena. "The 1980s were the decade where we built it up, and the 1990s are the decade where we're going to manage it," Dale-Johnson said.

Smith agreed, explaining, "We're seeing a lot of our clients buying shopping centers that offer an opportunity for repositioning and recycling by putting in new anchor tenants, 'category killers,' and making attractive improvements."

A category killer is a retail tenant that dominates its particular market niche, such as a Blockbuster Video store.