Lenders still shun commercial real estate projects.

After being burned by scores of real estate deals gone bad in the early 1990s, most major lenders in Southern California have adopted a similar stance toward commercial real estate construction:

They want little or nothing to do with it.

"You don't see too much new building right now in L.A. County," said Guy Johnson, president of Johnson Capital Group Inc., a real estate investment advisor in Century City. "In most (of L.A. County), the economics would not justify new development."

Johnson explained that while there's no shortage of capital in the market, local lenders have earmarked little, if any, funds for commercial red estate development in recent years.

Before the situation can change, he explained, the cost of building new buildings must first fall below the cost of buying existing identical building in the same markets.

As it now stands, it is usually cheaper to buy an existing building in most L.A. sub-markets than develop a new one.

Retail and industrial property are two notable exceptions to the current embargo on financing for new commercial development in L.A.

Lenders have financed a handful of new industrial projects, but only in specific markets where tenants are committed to projects upon their completion, according to Mike Melody, executive vice president of L.J. Melody Co., a mortgage banker in Newport Beach.

"We see some development for build-to-suits (i.e. industrial properties constructed for one specific tenant) and bulk industrial warehouse facilities in certain submarkets," he said.

Lender interest in industrial development is being driven by declining vacancy rates for industrial properties over the past year. In some of L.A.'s hottest markets, industrial vacancies have even dropped into single digits in recent months.

Still, rents at existing industrial properties are still too low for most lenders to consider substantial new development in many markets.

Of the few projects to obtain financing, Melody has been involved with two in Southern California. Both of those are "speculative," meaning there are no pre-lease commitments on the properties.

The first is an $8 million project in Santa Fe Springs, where construction has begun. In the second, the developer has purchased land in Ontario and will begin construction in the next few months.

Both projects are being financed by Copley Real Estate Advisors of Boston.

On the retail front, most lending has been for one particular product type: the "power center." Power centers are large shopping malls, usually outdoors, anchored by "big box" tenants, which are large retailers that specialize in specific types of merchandise.

"Power centers make sense because they traditionally come with substantial pre-leasing agreements," said Johnson, noting that many new power center projects are being boosted by big-box tenants eager to expand their L.A. presence.

But even in the retail market, lending opportunities for new development may be drying up, according to Doug Stewart, executive vice president and manager of the specialized banking division of downtown L.A.-based Sanwa Bank of California.

"Retail is attractive, but it's beginning to get saturated," he said.

Sanwa itself was a commercial real estate lender during the 1980s, but later pulled out when the market went sour in the early 1990s. It re-entered the market in 1993, though only on a conservative lending basis, said Stewart.

Specifically, most of Sanwa's current commercial real estate lending is short-term, while buildings are under construction. Once a project is completed, Sanwa typically lets long-term lenders, such as insurance companies, come in and refinance the properties.

Imperial Bank of Inglewood is taking a similar approach to its commercial real estate lending, according to Don Hinton, a senior vice president at Imperial and manager of the bank's real estate division.

"We did some commercial real estate lending in the 1980s, but we got out around mid-1990. We don't want to be a permanent lender," said Hinton, explaining that Imperial will currently only consider short-term loans for any commercial development projects.

"I think it's unlikely that (mid-market) commercial banks will be playing a major role (in commercial real estate lending) outside of short-term construction," he said.