In an echo of the early 1990s, when a credit crunch ground the commercial real estate market to a halt, real estate players are saying that loans are suddenly harder to come by.

Bankers say officials from the Federal Reserve and the Office of the Comptroller of the Currency have visited several large and midsize banks, following up on a cautionary letter from the Fed in June.

The regulatory initiatives come as equity investors sell off real estate investment trust shares, making it harder for the trusts to raise equity capital. At the same time, global economic problems have crimped lending by international investment banks.

The problems with overbuilding and bad loans that brought on the last credit crunch are not yet visible in the current market. But executives at a real estate investment trust conference in Baltimore last week said the change in the atmosphere has been palpable.

"Lenders have started to be discriminating on the types of projects they finance," said Anthony W. Deering, chairman and chief executive of the Rouse Co., a national land developer. "Before, the view was of a tide raising all ships. Now we're close to high tide."

The role of the regulators recalls the early part of the decade, when angry developers, bankers, and politicians blamed them for overreacting to the real estate bust of that time.

So far the intervention has failed to arouse such furor-possibly because tough regulation has been credited with putting banks back on a profitable path since then.

"We were very happy to have those meetings," said Michael J. Hannon, co- head of real estate banking at PNC Bank Corp., Pittsburgh. Mr. Hannon and other bankers argue that REIT lending is a much safer way to finance real estate than the lending to private companies or on specific projects. No regulatory actions have stemmed from the visits.

Still, the intervention sent a signal that banks have heeded. "You see it in the bank syndicate market, in how aggressively banks are stepping up to underwrite, how large the positions they take, how liberal the structures," Mr. Hannon said. "You're seeing caution."

Henry Froelich, who helps oversee REIT lending at NationsBank Corp., Charlotte, N.C., says that over the summer the number of banks interested in REIT loan syndications has dropped off. Six months ago, he recalled, such deals would have been two times oversubscribed. "Now we're getting the exact amount of other bank participants we needed."

The Fed's cautionary letter in June singled out REIT lending as a particular area of concern, and urged examiners to look into the matter. A Fed spokeswoman said any discussions Fed examiners had with banks on the subject "have been through the regular supervisory process."

David Gibbons, deputy comptroller for credit risk at the OCC, said his agency's informal reviews were also done "in the ordinary course of supervision."

The Fed's letter noted that bank lending to REITs had increased in the last year. "It was not a safety and soundness issue," said Steve Wechsler, president of the National Association of Real Estate Investment Trusts. Rather, the Fed wanted to make sure lenders were using the same criteria and due diligence in the sector as they were in other types of lending, he said.

Bankers said REITs were safer than more traditional real estate companies because of their low leverage. According to the association, the average REIT is 35% leveraged. And the companies enjoy "a variety of choices in terms of finance," said Mr. Wechsler.

Mr. Gibbons said that though the trusts are less leveraged than in the past, banks should be on the lookout for REITs that try to enhance shareholder returns by increasing their leverage or speculative activities.

As public companies, REITs are subject to greater disclosure, said David Genovese, a principal in the real estate investment banking group at BT Alex. Brown, sponsor of last week's conference.

Moreover, "every loan (to a REIT) is collateralized by diverse portfolios of properties," in contrast to more traditional types of real estate lending which are "subject to asset concentration risk," Mr. Genovese said.

Part of the current credit pinch results from the discipline that has been injected in the market by the increased level of securitization of real estate assets.

"This is one of the few times in the real estate business we've seen the markets having an impact on the sources of financing," said Kenneth J. Witkin, managing director of Fleet Real Estate Finance.

While REIT stock prices have fallen, spreads on commercial mortgage- backed securities have widened dramatically since late August, reflecting Russia-related fears.

That is one of the factors which has led Credit Suisse First Boston to pull back a bit from commercial realty lending by charging higher spreads, said Andy Stone, a managing director at the firm.

Credit Suisse acts as a conduit, making fixed-rate mortgages on commercial properties and repackaging them into securities which it sells to investors. "We've not seen a (commercial mortgage securitization) deal since the debacle started," Mr. Stone said.

If market conditions fail to improve, he said, "my fear is we'll be stuck with loans that aren't saleable. There's demand for our monies, but I'm not sure our bond buyers have demand for our products."

Though turmoil in the emerging markets has eroded values of junk bonds, stocks, and other assets, Mr. Stone added, "I've not seen any impact in the real estate market of any magnitude. The (real estate) market may need to correct relative to the other markets. It may not be a good time to extend credit."

Lehman Brothers has also raised its spreads, and is requiring more equity from borrowers, "because we can," said a source at the firm who asked not to be named. "A few large lenders have pulled back, creating more product for the lenders who are left," this person said.

San Francisco-based Capital America, which was spun off from Nomura earlier this year, boasts that it has not retrenched one iota. In the last three weeks the firm has closed $1.6 billion of loans and committed to an additional $600 million, said co-chief executive officer Brian Pilcher. "In the last month we've seen increased demand" as other lenders have stepped back, Mr. Pilcher said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.