Commercial real estate prices are on the rise again in New England, but community bankers remain gun-shy about getting back into a market that caused them so much grief in the early 1990s.
For banks and thrifts with less than $5 billion of assets, commercial real estate loan volume has remained flat since the end of 1991, with about $18.2 billion on the books last June 30. About $18.6 billion was on the books Dec. 31, 1991.
Community banks are dependent on the stability of the regional real estate market because many of their commercial loans are secured by property.
But the collapse of the market in the early 1990s and its slow and rocky recovery have left bankers nervous about real estate loans, which are seen as highly risky under new capital rules.
"We're being very selective, very careful, and very conservative," said Gary M. MacElhiney, executive vice president of commercial banking for Webster Financial Corp. in Connecticut.
"Ten years ago, banks were anxious to lend on real estate. Four years ago, banks were unwilling to lend on any kind of real estate. And today, banks have a limited appetite for what they perceive to be quality real estate."
Five years after the bottom fell out of the real estate market, property values are picking up again in the greater Boston area, as well as in New Hampshire, Maine, and Rhode Island, observers say. Connecticut, however, still lags behind in economic recovery.
"The bottom has been reached and we're slowly progressing on an upward course toward recovery," said Gerard Cassidy, bank analyst at Tucker Anthony's Hancock Institutional Equity Services. "But by no stretch of imagination are we back where we were at the peak in 1989 and I don't think we'll be there for some time to come."
In the meantime, recent memories of the real estate debacle die hard in the minds of New England's bankers.
"The smaller banks got really creamed in real estate in the early 1990s after the bust and commercial real estate values were so volatile and the feds were so aggressive about making them mark to market," said Karl E. Case, visiting scholar at the Federal Reserve Bank of Boston. "These guys, they're just nervous and justifiably so."
Robert Listfield, principal of the banking group of EDS Management Consulting Services in Waltham, Mass., agreed.
"Community banks are more inclined to stay with what they know than move off to the fringes, which was done in '86, '87, and '88," he said. "There's a greater sense that you can get burned by these things than there was before."
That means that community banks are leaving larger, more complex real estate loans to regional giants like Fleet Financial Group, Citizens Financial Group, Bank of Boston, BayBanks Inc., and Shawmut National Corp. The big banks can sell the loans on the secondary market without booking them and risking losses, said James Moynihan, senior vice president of Advest in Boston.
"I think there's a general realization that those things (larger real estate loans) caused trouble in the past," Mr. Listfield said. "That is the more troublesome part of their portfolios and they're more willing to leave some of that to the big boys, particularly the more exotic stuff and the larger deals."
But the reluctance to lend could also pose a challenge for developers and small businesses seeking financing, especially for new construction, since prices on existing facilities are still much lower than the cost of building new.
"We're beginning to turn a corner from a period when it made sense not to build to a period when it makes sense to build," said Mr. Case, noting that there was a glut of real estate in the 1980s. "There will be an increased demand for capital in the building sector. (Community bankers' fears) may well slow things down."
In a return to their roots, community banks and thrifts are refocusing their attention on developing banking relationships with small businesses and making loans to them using owner-occupied property as collateral.
"It is recognized that that is an absolute necessity if you're going to be a community bank and you're going to serve the business community," said Jeffrey Cohn, bank analyst with H.C. Wainwright in Boston.
But unlike the 1980s, community bankers are basing these loan decisions on the borrower's income stream and ability to repay, not on the appraised value of the collateral property.
"Community bankers are still very cautious on" commercial real estate, said Lawrence Connell, president and chief executive of Atlantic Bancorp in Portland, Maine. "To the extent that they are returning to that market, it's for the most part on some of the more fundamental standards that were forgotten in the 1980s."
Other bankers agreed.
"Our standards are different than they may have been three or four years ago," said William H. Chadwick, president and chief executive of Banknorth Group Inc. in Burlington, Vt. "Just because a building has value doesn't mean we'll make a loan against it."
And community bankers are choosing owner-occupied properties over the speculative investor loans and large project ventures, such as strip malls and office complexes, that plummeted in value during the recession.
"We will not, nor I think, will anybody up here, do speculative projects based on future tenants or future rent flow," said John W. Fridlington, executive vice president of People's Heritage Financial Group in Portland, Maine. "It's based on existing tenants and existing commitments."
Institutions are also sticking to familiar territory where they know their customers, rather than straying out of New England or even out of their immediate market.
"Those (community banks) that are in it have learned a pretty good lesson from the recession," Mr. Moynihan said. "If they're going to do any kind of commercial lending, it's only going to be within their own market."
