Lending to acquire commercial property plunges.

Loans off by one-third in first seven months of 1992

The amount of money loaned for acquiring commercial real estate in Los Angeles County dropped by one-third during the first seven months of this year, compared with the like period of 1991, as loss-plagued lenders clamped down even harder on commercial real estate lending practices here.

Specifically, the amount of new commercial purchase loans in L.A. County for the January-through-July period fell to $1.2 billion, down from $1.8 billion a year ago, according to TRW-REDI Property Data Services.

Statewide, the drop was less severe, from $4.4 billion in January through July of 1991 to $4.0 billion for the same period this year, representing a 9 percent drop.

The volume of refinance and equity loans on commercial real estate was also down during the first seven months -- both in L.A. County and statewide, TRW-REDI reported.

In Los Angeles County, commercial real estate refinance and equity loan volume was $3.1 billion for January through July, compared to $3.7 billion for the like year-ago period. That represented a 16 percent decline.

Statewide, refinance and equity loan volume on commercial properties was $9.9 billion for the first seven months of this year, compared to $12.7 billion for the like period last year, a drop of 22 percent.

"I think what you have is just a paranoia on the part of the lending community about what's going on with California commercial real estate," said Jack Kyser, chief economist with the Los Angeles County Economic Development Corp.

Falling property values is the reason banks are reluctant to lend on commercial properties, Kyser said. "If you are trying to refinance, there is concern about what is the real value of the property?"

Gary Zimmerman, economist at the Federal Reserve Bank in San Francisco, noted that the drop-off in new real estate loans mirrors an overall decline in the amount of California real estate loans outstanding. The decline is particularly acute for construction loans, he said.

As of June 30, total real estate loans outstanding in California were $125 billion, compared to $129.1 billion a year earlier, a drop of 3 percent, Zimmerman said.

The volume of construction loans outstanding, meanwhile, fell to $19.5 billion as of June 30 from $23.9 billion a year before, a shrinkage of 19 percent, Zimmerman said.

"Historically, real estate lending has continued to grow through the recession. But the numbers we're seeing show growth has fallen off in the last couple of quarters," he said. "Clearly, construction is hardest hit."

Zimmerman said banks are reluctant to lend because problem loans are continuing to grow.

Statistics from the California State Banking Department supports Zimmerman's contention that construction loan portfolios are in the worst shape, followed by loans backed by commercial real estate. Meanwhile, non-real-estate-related business loan portfolios are relatively healthy.

Specifically, 17.4 percent of California banks' total construction and development loans and 6.45 percent of their loans backed by commercial real estate were 30 days or more past due as of June 30.

That compares to a rate of 5.81 percent for all real estate loans and 5.15 percent for non-real-estate-related business loans which were 30 days or more past due as of June 30.

At Sumitomo Bank of California, a bank known for its California hotel financing in the 1980s, the amount of new construction loans made so far this year are down from last year, confirmed Yasugi Doi, the bank's vice president and administrative officer of credit for Southern California.

Sumitomo has made "maybe less than five" new construction loans this year, Doi said, which is fewer than last year, although he said could not quantify the difference.

According to TRW-REDI, Sumitomo made four construction loans for a total of $7.1 million in the period of January through August 1992, compared to seven construction loans for a total of $22.3 million during the like period in 1991.

"The bank's policy has changed. We don't see as many good projects," Doi said.

Sumitomo is now demanding that real estate developers plunk down 30 to 35 percent equity in a project, up from the 20 to 25 percent equity required last year, Doi said.

"We are carefully selecting (new loan candidates) from our existing customer," Doi said. The reason is "we have experienced a significant amount of charge-offs," he said.

A charge-off occurs when a loan is taken off the books and charged as a loss because the loan can't be collected, or the value of the loan has depreciated.

Sandra Cortes, vice president of commercial lending at First Interstate Bank and a member of the California Bankers Association's commercial lending committee, said that banks these days want to make commercial business loans, but not commercial real estate loans or loans secured by commercial real estate.

Because of the recession, many businesses are looking to downsize rather than expand.

Few businesses are looking for loans, Cortes said.

But when it comes to commercial real estate loans, "the reverse is true," Cortes said.

"There are many, many people looking for commercial real estate loans," the First Interstate executive added.

Banks, reeling from bad commercial real estate loans, are now looking for more diversified portfolios, consisting roughly of one-third commercial business loans, one-third commercial real estate loans and one-third consumer loans, Cortes said.

This translates into bad news for those seeking commercial real estate loans in Southern California, she said.

Southland banks already have an average of 38 percent of their loan portfolios invested in commercial real estate, Cortes noted.

Thomas Cowan, a vice president of Sanwa Bank in Los Angeles and also a member of the California Bankers Association's commercial lending committee, said banks will begin to make commercial real estate loans when the economy improves and they stop taking losses on loans going into default.

"The whole thing that runs the banking industry is liquidity," he said. "Your lending capability is tied to your equity position."