The president of the Mortgage Bankers Association has added his voice to the chorus warning commercial real estate lenders to be vigilant about credit quality.
"In these competitive times, we are ripe for wrong decisions," MBA president Marc Smith told those attending his association's real estate conference here. "We don't need to do that. We must keep standards high."
With nonresidential real estate valued at $4.2 trillion, eye-popping amounts of money pouring into real estate through the capital markets, and competition among lenders stiffer than ever, the temptation to throw caution to the winds is great, he acknowledged.
But in an interview Monday, Mr. Smith, who is president and chief executive of Crestar Mortgage Corp., asked lenders not to compromise their standards in order to make production numbers.
"It is a cyclical industry, and these are the days that test disciplined underwriting standards," Mr. Smith added.
A record 4,200 real estate professionals showed up at the MBA conference to celebrate an era of remarkable prosperity.
Commercial mortgage-backed securities volume exceeded $44 billion last year, and real estate investment trusts ended 1997 with $140 billion of market capitalization.
But for the most part, those at the conference were told by industry leaders and economists that today's favorable environment cannot last.
"We've had four terrific years, our economy is great, but what goes up, comes down," said Robert Reich, former secretary of labor in the Clinton administration. "We know this economy is going to slow. The question is when."
Mr. Reich warned that deflation-a decrease in prices that occurs when demand lags the supply of goods and services-could dramatically affect the commercial real estate market. Though deflation is not imminent, he said, it could result from the Asian economic crisis and slow growth in other international economies.
For the real estate market, the "classic deflation nightmare" creates a scenario in which the value of collateral is not worth enough to repay loans.
To deal with a possibly more challenging economy, "it's important to change-particularly when things are going well," Mr. Reich said.
"Change is the hardest thing to manage when you've been successful. But this is exactly the right time to be creative and innovative."
Mr. Smith agreed. "Change before you have to is a good notion of the nature of productive behavior in a competitive marketplace," he said. "The challenge is that it requires the energy diversion from competition, and that's a tough draw in a robust market."
Some at the conference agreed that changes are important yet also noted how difficult change may be when competition is so stiff.
Spreads on commercial mortgage-backed securities "have become ridiculously low" and do not reflect the investment's risk, said Robert Heisz, a vice president at Royal Bank of Canada. "By acting now, we can balance things for the future."
Another real estate lender said that now is a pivotal time in real estate finance, with values increasing at a torrid pace in markets across the United States.
"Real estate values are increasing faster than is justified," the lender said. "From an underwriting and credit perspective, collateral values are being artificially inflated."
He said the industry should be "lending on the true economic value, not just what the market will bear."
