Loan volume wilts as financing crunch continues.

The volume of commercial real estate lending in 1991 was a fraction of what it was in 1990 and, with office vacancies high and bad loans still causing problems, top bankers say there is no reason to hope that the lending crunch will be over soon.

Commercial real estate refinance, purchase and construction loans in Los Angeles County plummeted in 1991 to $2.97 billion, according to Dataquick Information Services Inc. of La Jolla. The 1991 volume was 61 percent of the $4.85 billion total in 1990 and 50 percent of the $5.83 billion in 1989, according to Dataquick.

Last year, commercial real estate loans totaled $687 million in first quarter, $788 million in the second quarter, $628 million in the third quarter and $869 million in the fourth quarter. First-quarter 1992 loan volume figures were not available at presstime.

Bram Goldsmith, chairman and chief executive officer of Los Angeles-based City National Corp., said virtually all commercial real estate construction loans his bank is financing are for existing customers building space for their own use.

Last year, City National lent $322 million for office, industrial, retail and multi-family construction, compared to $450 million in 1990, according to documents supplied to the Securities and Exchange Commission.

No bank will lend on speculative office construction, "knowing there is a 24 percent vacancy rate in this town," Goldsmith said. "Today I would be looking at a minimum of 60 percent pre-leased with strong tenancy."

The strength and integrity of the actual tenants signed to occupy buildings to be constructed is important, he said, because "there have been a number of situations around town where people have taken free rent and disappeared."

Goldsmith noted the tighter rules would probably not be in place forever. "Real estate historically has been a rollercoaster," he said.

Dan Platt, vice chairman of Security Pacific Corp., said lending volume at Security Pacific Bank is way down from what it was two years ago. One reason, he noted, is that loan demand is way down.

Maguire Thomas Partners, for example, is not currently interested in construction loans but may be in the market to buy troubled real estate projects and approved but unbuilt projects at cut-rate prices, said Ned Fox, senior partner at the Santa Monica-based development company.

"Today, a bank is only going to finance a project if it has real, demonstrated cash flow and an equity commitment from the borrower," Fox said.

A few years ago, banks would finance 100 percent of a project, he noted. Today, they are demanding the developer plunk down 20 to 30 percent of the cost of the project, Fox said.

Union Bank is still lending, although not as much as it had in the past, said Stanley Kafka, Los Angeles area executive of the bank's real estate finance group.

"We happen to be the exception to the rule," he said. "We have been active throughout the entire part of the down cycle. It has been the bank's policy that we are never out of the market and we support our good customers in good times and bad."

However, Union Bank won't make any deals and many of its good customers are not asking for construction loans these days, Kafka said. And when Union Bank finances a new project now, the developer must invest more equity and pay more interest and a larger fee than two years ago, he said.

"Who we do stay away from is the under-capitalized guys who are building things they haven't built before," Kafka noted.

He described a typical Union Bank customer as a locally based, middle-market entrepreneur, and said "people who do $100 million office buildings" are not Union Bank clients.

California banks and especially savings and loans have been slimming down their commercial real estate loan portfolios over the last two years, said Gary Zimmerman, an economist with the Federal Reserve Bank in San Francisco.

Banks held $23.1 billion in outstanding construction loans in 1989, $24.3 billion in 1990 and $21.9 billion in 1991, according to Zimmerman. Savings and loans held only $5.6 billion in commercial construction loans in 1991, as compared to $11.5 billion in 1990 and $14.7 billion in 1989, Zimmerman said.

Banks' portfolios of commercial loans secured by commercial real estate stood at $23.8 billion in 1989, $30.8 billion in 1990 and $33.5 billion in 1991, Zimmerman said. Savings and loans' portfolios of commercial loans secured by commercial real estate was at $31.5 billion in 1989, $25.8 billion in 1990 and $23.1 billion in 1991, he said.

"Clearly there is lending going on, but it is not going on at the same level it was several years ago," Zimmerman said.

Lease rates: Central city reflects demand

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lease a 2,000-square-foot shop against 10 percent of his gross sales, the retailer wouldn't have to pay the 10 percent of sales unless it sold more than $400,000 in merchandise, or $200 per square foot per year. If the retailer sells $600,000 in merchandise or $300 per square foot during the year, it pays the $40,000 base rent, plus $20,000 (10 percent of the $200,000 over the $400,000).

In South Central Los Angeles, Watt Commercial's Heller said drug stores, grocers and discount retailers such as National Dollar Stores Ltd., J.J. Newberry Stores Inc. and Boys Market Inc. ring up sales of $275 to $400 per square foot per year, a higher take than many of the major shopping centers report, said Andy Natker, a developer with Los Angeles-based Alexander Haagen & Co.

Alexander Haagen's developed Vermont Slauson Center, a 130,000-square-foot center at the intersection of Vermont and Slauson in East Los Angeles, the 100,000-square-foot Martin Luther King Jr. Center in Watts, and Kenneth Hahn Plaza, a 150,000-square-foot center in Willowbrook between Compton and Watts.

"Unlike East Los Angeles, there is a high vacancy in the strip retail centers along the major streets. They are in high crime areas and residents want to shop in a secured area," Natker said.

Centers that Alexander Haagen and competitor Watt Commercial Development have built in the South Bay provide extra security guards in the stores and on the parking lots to deter crime, Natker said.

"Our tenants pay from $1.10 to $2.00 per square foot per month for the space, but they also pay 35 cents per square foot per month to pay for the security," Natker said.

Watt Commercial took advantage of redevelopment funds to build the centers. In this and similar situations, the city redevelopment agency uses its power of condemnation to acquire a building site. They buy the property and invite developers to propose projects the redevelopment agency thinks will enrich the community, Heller said.

In South Los Angeles, Compton and Carson, redevelopment organizations have successfully built neighborhood shopping centers anchored by grocers and drug stores that realize greater sales per square foot than their counterparts in middle-class and upper-middle-class neighborhoods.

The Carson-Compton-Watts area, which has a reputation for being a tough neighborhood, is changing demographically from 90 percent black to 52 percent Hispanic in the last 10 years, Heller said.