Just as bankers are regaining the courage to lend on commercial property, some experts are predicting a significant aftershock of the realty crisis that so recently shook the industry to its foundations.
In the first years of this decade, banks restructured or sold about $400 billion of poorly conceived 1980s' property loans as they came due, absorbing huge losses in the process.
A concurrent tightening of credit standards helped tip the economy into recession and sent some borrowers running to their Congressmen with complaints of a credit crunch.
Now many of the loans that banks restructured, rolled over, and kept on their balance sheets are coming due again - on the heels of a 300-basis- point increase in short-term interest rates.
In successive waves over the next few years, these distressed loans will be "repriced" at rates that surely will be higher than those offered at the nadir of the recession. But it remains unclear whether higher financingcosts can be passed along in the form of higher rents and property sales prices.
Almost certainly, experts say, there will be a fresh round of bank foreclosures and property sales - and possibly some charges against earnings and loan-loss reserves.
"Real estate is just stepping out of the grave, and as it steps out it gets shot again," said Thomas J. Barrack, president of Colony Capital Inc., a firm that specializes in refinancing troubled real estate debt.
The only question is how bad it will be.
James McDermott, president of Keefe, Bruyette & Woods Inc., said it is reasonable to expect the new round of restructuring.
However, this expert said, "I don't think its going to result in any atypical reserving" for most banks.
Mr. Barrack, whose firm is positioned to take part in any uptick in real estate workouts, acknowledged that a repeat of the earlier crisis is unlikely. But the executive asserted that the new round of repricing would swamp some players.
"We think we're going into it again by the fourth quarter of this year," he said. "What we've just experienced was a tidal wave. What is coming next is not going to be tidal wave, but it will be sufficiently large to push the surfboard to shore."
Mr. Barrack noted that the Federal Reserve has pushed up rates 300 basis points in seven steps over the past 13 months. "That decreases, on an average basis, the debt service coverage ability of borrowers," he said.
Potentially compounding the problem, significant additional foreclosed property has been put up for sale in recent months as Japanese banks began recognizing losses on their U.S. property loans.
Higher rates have already cooled the real estate investment trust market and made securitization of real estate more difficult.
The impact of the Fed's tightening has yet to be felt by banks, however, because the commonly used indexes for loan rates often lag behind the Federal Reserve rates by seven months or so.
In the meantime, property values appear to be rising, though possibly for the wrong reasons.
One valuation technique is the capitalization rate. This is derived by dividing a property's annual net operating income by its sales price. A high resulting fraction indicates a comparatively low sales price, and vice versa.
Mr. Barrack said the average capitalization rate of real estate is continuing to slide, indicating an increase in perceived property values. But he said the current cap rate of about 8% is "incongruent," given that market interest rates are rising.
In the opinion of Mr. Barrack, the decline in cap rate probably means investors "are betting on inflation" to boost values, rather than focusing on the net operating income of properties - a pattern that is ominously familiar to those who saw what went wrong in the 1980s.
The bank assets likely to be repriced in the next wave of restructurings are the large, more complex projects that banks refinanced and kept on the books. Pools of smaller loans and properties were auctioned off.
The holdover, complex properties are likely to be located on the coasts, in markets that have never fully recovered from overbuilding, Mr. Barrack said.
He pointed out that the repricing process involves a ripple effect. "For every building on corner A that is repriced, buildings on corners B, C, and D will eventually reprice themselves."
Mr. Barrack estimates as much as $300 billion of real estate remains to be repriced, as banks and insurance companies followed in the thrift industry's wake in cleansing their balance sheets of the ill-conceived loans of the 1980s.
That is down from Mr. Barrack's earlier estimate of $500 billion. The difference lies with insurance companies, he said, which are facing less pressure to unload properties as realty values recover somewhat from their nadir in the early '90s.
On the other hand, Japanese banks will make up for some of the lost volume. They are following the lead of Sumitomo Bank, which last year took the unprecedented step for a Japanese institution of establishing an $8 billion loan-loss reserve.
Mr. Barrack said Japanese banks could bring as much as $60 billion of U.S. property to market in the next 18 months.
One reason the next wave won't be as devastating to U.S. banks as the last one is the presence of eager investors.
These include Mr. Barrack's firm, "vulture" funds run by the likes of Sam Zell of Chicago, and other real estate funds run by investment banks such as Lehman Brothers Inc. and Morgan Stanley & Co.
"The good news is, the value of the assets went up as the number of buyers in the market made bidders more aggressive," said Jack Rodman, managing director of the Kenneth Leventhal & Co. "Instead of 20% to 30% returns on their investment, they're now very happy with returns of 10% to 15%."
A modicum of price support means that restructuring charges on foreclosed properties won't be nearly as big.
Mr. Barrack said that some banks may see the repricing as an opportunity to make new loans. But he advised caution.
"The banks are going to have to be more discerning about their investment criteria in providing variable-rate loans," he said. "Most are not equipped with the proper personnel to evaluate loans. It's a very dangerous business."