Construction lending virtually disappears in L.A.

Ripple effect translates to $14 billion economic loss

It is no secret that financial institutions have put the brakes on construction lending in the overbuilt Los Angeles County marketplace. But new projections by TRW-REDI Property Data Services indicate the extent of that braking may be far more severe than previously thought.

Specifically, TRW-REDI projected the amount of construction loans issued for L.A. County projects this year will be less than 15 percent the volume issued here during the peak boom year of 1989.

TRW-REDI projected total construction financing for L.A. County projects this year will plunge to $1.2 billion, an 85.5 percent decline from the $8.3 billion in local construction loans issued during 1989. For the first eight months of 1992, TRW-REDI reported that banks lent only $828 million for L.A. County projects.

The virtual disappearance of construction lending is having an enormous impact on L.A. Country's economy.

For every dollar of construction financing, economists estimate that $2 is generated in the economy. By these calculations, the $7 billion drop in construction financing this year, compared to 1989, represents a $14 billion loss to the local economy.

The same numbers are resonating throughout California, according to TRW-REDI figures. The countries of Ventura, San Diego, Riverside, San Bernardino and San Francisco all had a 75 percent or greater drop in financing from 1989 to 1991. Orange County had a 64 percent drop.

The state average decrease in construction financing was 67 percent, according to TRW-REDI. Although some industry watchers were shocked at the magnitude of the drop-off in financing from 1989, local developers were not phased.

"I'm not surprised at all," said Chris Stirling, vice president of Homart Development Co. in Glendale, which owns 1.4 million square feet of space in L.A. County. "Most developers are dead."

Construction lending in L.A. County
1989                           $8.3 billion
1990                           $2.1 billion
1991                           $1.7 billion
1992 (projected)               $1.2 billion
Source: TRW REDI Property Data

"Most of the lenders we used to work with said they are completely out of the market in new loans, which is making life very difficult," said Jeff Dritley, president of the L.A. division for Koll Co., a Newport Beach-based developer.

"I'm not sure who's lending," he said. "We relied on pension funds and institutions in the 1980s, but they are no longer a viable source of capital."

He said the "very few transactions" taking place are being done with entrepreneurial family money, such as the Bass brothers, financiers out of Texas.

Since 1989, Koll has laid off 30 percent of its development group, Dritley said, and has changed from a speculative development company to a company that does build-to-suits -- owner-occupied projects built to the exact specifications of the owner-user. Koll has also focused on fee development, charging a fee to develop a project for the property owners.

Developers have been watching construction financing dry up since 1990. TRW-REDI data shows that construction financing plummeted to $2.1 billion in 1990, a 75 percent drop from 1989.

In 1989, Security Pacific topped TRW-REDI's list of L.A. County's top 20 lenders, with $680 million in local construction loans. Union Bank was second with $400 million and First Interstate Bank was third with $367 million.

In 1992, Security Pacific merged with Bank of America, and Bank of America only made $26 million in loans during the first eight months of 1992, dropping the bank to fourth on the list of 1992 lenders.

Union Bank topped the 1992 list with a mere $46 million in construction loans, an amount that would not have even qualified it for TRW-REDI's 1989 list of top 20 lenders. First Interstate Bank completely dropped off the 1992 list.

Developers said there are a number of very viable projects not being done because of overcautious financiers.

Top lenders for L.A. County Projects
1989
 1. Security Pacific National Bank         $680.2 million
 2. Union Bank                             $400.3 million
 3. First Interstate Bank                  $367.1 million
 4. Citicorp R/E Inc.                      $353.9 million
 5. Bank of America                        $338.2 million
 6. Glendale Federal Bank                  $256.6 million
 7. Chase Manhattan Bank                   $228.0 million
 8. Wells Fargo Bank                       $209.2 million
 9. Home Fed'l S&L                         $201.6 million
10. Continental Bank                       $194.7 million
11. First Nat'l Bank/Chicago               $184.0 million
12. City Nat'l Bank                        $160.3 million
13. Imperial Bank                          $146.8 million
14. California Fed'l Bank                  $138.5 million
15. Far West S&L                           $133.9 million
16. Pacific Funding Trust                  $133.7 million
17. Sanwa Bank/CA                          $125.3 million
18. Union Fed'l S&L                        $106.2 million
19. Old Stone Bank                          $94.4 million
20. American Nat'l Bank                     $67.7 million
Total:                                       $8.3 billion
1992 (August year to date)
 1. Union Bank                              $46.0 million
 2. Wells Fargo Bank                        $41.8 million
 3. American Int'l Bank                     $30.5 million
 4. Bank of America                         $25.7 million
 5. Bankers Mutual                          $22.4 million
 6. General Bank                            $18.5 million
 7. Santa Monica Bank                       $17.7 million
 8. Mechanics Nat'l Bank                    $14.9 million
 9. Cathay Bank                             $14.1 million
10. Pacific Heritage Bank                   $13.8 million
11. Home Bank                               $12.2 million
12. City Nat'l Bank                         $11.5 million
13. First Nat'l Bank/Chicago                $11.2 million
14. Cerritos Valley Bank                     $9.6 million
15. Foothill Independent Bank                $9.2 million
16. Far East Nat'l Bank                      $8.3 million
17. Queen City Bank                          $8.0 million
18. First Credit Bank                        $7.4 million
19. First Charter Bank                       $7.3 million
20. Pomona First Fed'l S&L                   $6.8 million
Total:                                     $828.4 million
Source: TRW REDI Property Data

In a speech on credit availability before bank regulators in L.A. last month, Richard Barkhurst, executive vice president of First Interstate Bank ($20 billion in assets), said the bank is "actively engaged in construction financing for single and multi-family housing," but not in commercial real estate.

He said the bank had a "disproportionately high" level of commercial real estate loans and is working to lower that level because of the poor economic forecast.

He said the vacancy rate in every downtown office market in the state currently exceeds 20 percent and quoted experts as saying it would take six years to absorb the excess capacity.

A spokeswoman from Union Bank ($16.9 billion in assets) said the bank made an internal announcement in August that the bank would only be doing construction loans for "efficient affordable housing."

Richard Dominguez, president of Industrial Bank, an independent community bank in Van Nuys ($80 million in assets), said his bank has "basically shut down real estate lending because of uncertain values and market conditions."

He said his bank was never big on construction lending, but it did do real estate lending in the form of mini-perms and equity lines of credit. Mini-perms are loans on completed real estate projects with monthly payments based on a 20- to 30-year amortization and a balloon payment due in three to five years.

He said his bank has not been making those types of loans in the last six months because real estate values are so uncertain.

"In a stable market, a lender can feel pretty comfortable relying on appraisal data for where a project will be two years down the road," Dominguez said. "Today, there is no way to come up with determining values."

Other bankers said it is not only the economy driving them out of construction financing, but it is the regulatory environment.

Dominguez said, in the '80s when S&Ls began disappearing from the market, the banking industry stepped in to fill the void in supplying loans.

Two years ago, major banks were criticized by regulators for looking like S&Ls because there was too much risk in speculative real estate, he said. Banks with a certain percentage of real estate loans -- 60 percent -- started getting letters from regulators, Dominguez added. New banking regulations passed by Congress put even further restrictions on bank lending.

Dominguez said as little as 25 percent of a bank's portfolio being in real estate would concern regulators today.

The word on Wall Street, according to one investment banker, is that earnings do not drive bank stocks any more. That driving force is now the bank's level of risk.

The boom in 1989 was a result of pent-up demand, said Joseph Knott, a partner in the L.A. office of the accounting firm Kenneth Leventhal & Co.

Construction activity is a multiple-year phenomenon, Knott explained. "There's a pipeline that builds up to a level of construction, and that pipeline had been building from 1986 forward," he said. "In 1990, the S&L crisis became very focused, and regulators demanded that financial institutions' exposure to real estate activity be curtailed."

"When the pipeline will start kicking in again is anybody's guess," Knott said.

Added Dominguez: "There's a big question mark on the future."