With Wall Street embroiled in bond market turmoil and cutting back on commercial real estate lending, commercial banks are suddenly moving to regain their former clout in the realty business.
Though memories of the 1980s debacle remain fresh, commercial bankers say that they are better equipped to continue lending than the investment banks and boutiques that have seized control of the market this decade.
And the bankers point out that the oversupply of space that burned them in the 1980s is not a factor in today's market.
"Banks will ultimately dominate this business," said Barry P. Reiner, managing director of commercial real estate finance at First Union Corp., Charlotte, N.C. "Events of late have demonstrated that."
The most notable such event was the resignation of Ethan Penner, founder and vice chairman of Nomura Holding America's real estate conduit, Capital America of San Francisco. Nomura later announced $275 million of losses at the unit.
Conduits make fixed-rate mortgages on commercial properties, warehouse the loans on their balance sheets, and repackage them into securities. Conduit loans generally have 10-year terms and range in size from $2 million to $40 million.
Since late August commercial mortgage-backed securities have fallen sharply. Lenders such as Capital America, which had been originating loans with securitization in mind, found themselves unable to sell those loans at a profit.
Capital America insists it is not retrenching, and said it has funded $1.7 billion of loans in the last month. Last week Nomura Securities bailed out its U.S. unit with $380 million of equity and $150 million of debt, and two top Nomura executives in the U.S.-William Wraith 4th, co-chief executive officer, and Mark McGauley, chief operating officer-resigned.
But in late August, WMF Group of Vienna, Va., sold close to $700 million of commercial mortgages at a $30 million loss. WMF had intended to securitize those loans in September, but when commercial mortgage-backed securities prices fell, it decided to cut its losses.
And two other investment houses, Credit Suisse First Boston and Lehman Brothers have both indicated recently that they will be less aggressive, charging higher interest rates on their loans.
According to industry newsletter Commercial Mortgage Alert, Capital America, Credit Suisse, and Lehman were the top loan contributors to commercial mortgage-backed offerings in the first half, with a combined 39.6% market share.
And the newsletter reports that executives at conduits are privately acknowledging that origination volume may have fallen by more than 50% in the past month.
"For banks who have healthy balance sheets and are light on commercial mortgages, now might be a great time to slip into the market," said Michael A. Ervolini, chief executive officer of Charter Research, Boston.
Commercial banks enjoy a lower cost of funds than Wall Street, bankers and industry observers said. Although many banks run their own conduits, as investment banks do, they have the flexibility to hold on to their loans for a longer period of time.
"We don't have to bring them to market," Mr. Reiner said. "If we elect not to do a transaction and wait for the market to improve, we have the ability to do that."
Lenders such as Capital America finance their inventory with warehouse lines, making them subject to margin calls. At First Union, on the other hand, "We have a $240 billion balance sheet standing behind this operation," Mr. Reiner said.
"In the short run, nobody's making money on the securitization side," said Douglas D. Danforth, managing director at PNC Bank, Pittsburgh, which contributed $395 million of loans to a $2.9 billion securitization that was priced two weeks ago.
PNC took a loss on those loans, but made up for it in other ways, he said. When the mortgages were held on PNC's books, the bank profited from the spread between its own borrowing costs and the higher interest rates on the loans. "With a warehouse line we would not have had positive carry."
A PNC subsidiary, Midland Loan Services, will act as servicer of the loans, bringing in fee revenue. "Wall Street conduits have neither a low cost of capital nor a servicing platform," Mr. Danforth said. "We may or may not do a securitization in the fourth quarter. Other people have to."
Investment banks dominate the business, with 68.8% of market share at the end of the first half of the year, according to Commercial Mortgage Alert.
"Wall Street invented the technology and made enough money from securitization to sustain itself," Mr. Danforth said. "Going forward you may need more bites at the apple. A year from now the landscape is going to be very different, if not sooner."
The current liquidity pinch in real estate stems not from the real estate market but from the capital markets. Even before commercial-mortgage backed bonds softened, real estate investment trust shares tanked this year, restricting the capital available to finance acquisitions and projects.
But the fundamentals of real estate remain solid for now, observers say.
"In the short run there are a lot of good loans to be made," said Mark Edelstein, a partner at Milbank, Tweed, Hadley & McCloy. "Banks can be choosy now and pick some good projects to finance. There doesn't seem to be a great an oversupply as in the 1980s."
Not all bankers are gung ho about usurping the First Bostons and Lehmans of the world. William Rothman, a managing director in Bank of America's Los Angeles office, is skeptical about the use of banks' balance sheets to hold loans for an extended period of time.
"I suspect that if banks start doing a lot of that, we will be having a conversation with the Fed," he said. "Real estate is a cyclical business. If you make a 10-year loan, by definition you're lending into a cycle."