In the midst of a dramatic revival in the nation's commercial real estate markets, a few bankers are beginning to sound a note of caution.
At a crowded conference last week in New York, these bankers said they are growing choosier about real estate deals as loan rates fall and terms get looser.
"If the risk/return dynamics are too aggressive, we'll pass," said Robert Blumenthal, managing director of Bankers Trust New York Corp., who was co-chairman of the conference sponsored by the real estate institute of New York University's school of continuing education.
"One has to be prudent and not necessarily get caught up in a commodity business. Banks learned their lessons, and those who were there in the past don't want to be there again," Mr. Blumenthal said.
Speakers at the conference said the notoriously cyclical real estate industry appears to be positioned for another two or three years of growth.
The banking industry, having recuperated from billions of dollars of bad loans just before the last real estate downturn, has played a large part in the revival, making financing more available for development and expanding the ways it provides that financing.
"Banks are applying securitization and structured finance techniques to development finance," Mr. Blumenthal said. "At the same time, the lines between investment and commercial banking are blurring, and as more participants are in the market, due to competition, the costs and the spreads will be reduced."
Previously, commercial banks specialized in secured lines of credit, while investment banks furnished developers with mezzanine debt and preferred equity or played advisory roles.
Now that commercial banks have equipped themselves to provide investment banking services, and investment banks have built their loan shops, the bankers said there is as much capital in quest of real estate as there is real estate in quest of capital.
Also boosting the market is a deep pool of investors-pension funds, insurance companies, and even banks-who are eager to participate in all aspects of real estate finance.
"For the right project and the right returns, there is an investor to invest in every piece of the capital structure," Mr. Blumenthal said.
Ethan Penner, executive managing director of Nomura Securities International, said securitization has led to the "bifurcation of risk and reward," and that has allowed the risk to be divided among different classes of investors.
The abundance of capital has changed the landscape of development much faster than anyone expected during the so-called credit crunch of the early 1990s.
"Certainly it's better to be a borrower in this market," said Tino Kamark, a managing director and chief operating officer of AEW Capital Management, Boston.
James Fitzgerald, a senior vice president at Credit Lyonnais, agreed: "A ton of new money is in the market from construction lenders."
But with so much capital coming into the industry, some raised concerns that the seeds of the next downturn have already been sown.
Speakers warned of crumbling lending standards, and attitudes about pricing risk that are so cavalier that developers are "laughing" over the rates.
"Some lenders are pulling back because of liberalization of structure," Mr. Fitzgerald of Credit Lyonnais said.
A majority, however, seemed confident that history won't repeat-as long as banks remain diligent about equity and insist on completion guarantees from developers.
"There is competition in spreads, but the covenant criteria are being held more firmly," Mr. Kamark said.
"Though financial buyers are driving the marketplace, there are different conditions than there were a few years ago," said Joseph DeLuca, a managing director at Chase Manhattan Corp.'s real estate finance unit. "There is not that dramatic supply-and-demand imbalance, and the ratio of development to refinancing is relatively small."
Others said the increased transparency of the market-fostered by the oversight of the ratings agencies who oversee the credits, and the equity analysts who monitor publicly traded real estate investment vehicles that represent 25% of the real estate market-would help prevent another meltdown.
"Our saving grace is the rating agencies that are bringing some semblance (of sanity) to the industry," Mr. Blumenthal said.
"In the past, the competition was driven by the number of people, now the driving force is return on equity," said Mr. Fitzgerald. "This is a discipline that didn't exist previously."