Commercial real estate is expected to make a subtle comeback next year and some community bankers are gearing up for the return.

Umpqua Holdings Corp. and Washington Federal Inc. both said last week that they were enhancing their CRE divisions in certain cities. Most of those cities have lost many local competitors who had gotten intoxicated on CRE before the real estate market collapsed. Now, the survivors are eager to take advantage on a recovery.

"We think the markets are starting to, and will continue to, come back," says John Swanson, who is leading Umpqua's new commercial real estate division. The $11.8 billion-asset company announced plans for the division on Monday.

A recent Federal Reserve Board survey of senior loan officers found that more than 13% of respondents are noticed stronger CRE demand in the fourth quarter, up from 1.8% a year earlier. Most economists expect commercial real estate lending to pick up in 2012.

"Barring Europe imploding, we do generally expect the economy to continue to improve and the real estate market to continue to improve," says Ryan Severino, senior economist at Reis Inc., a CRE research firm in New York. "If someone is thinking about ramping up their [CRE] lending process, now would not be a bad time to do it."

Within CRE, multifamily lending has already made a comeback, with aggregate 4% growth in revenue per unit for the year ended Sept. 30, according to Reis. Office space is starting to show signs of growth in revenue, at nearly 2% per square foot over the same period. Retail remains the sluggish as revenues keep declining.

While analysts caution that even the most-attractive sectors are not producing enough business to reverse a trend of shrinking loan portfolios, it may bring a few additional opportunities next year.

"There are some smaller banks that didn't do much CRE before and seem to be seeing small opportunities to buy loan originations" or "to underwrite them, particularly ones that have hair on them," says Brett Rabatin, an analyst at Sterne, Agee & Leach Inc. who covers Umpqua and Washington Federal. "Generally speaking, these credits are going to have really solid collateral."

Severino agrees, saying the "more reasonable" underwriting standards coupled with less competition creates commercial real estate loans that "tend to hold up pretty well throughout their lives."

The banks that are expanding their CRE divisions are finding plenty of available talent, unlike commercial and industrial lending, where competition has swelled and experts were few.

"Now is the time to bring in some experienced CRE people," says Swanson, now Umpqua's commercial real estate manager. "With the downturn and reduction in many CRE groups over the last two-to three-plus years, I've had an impressive list of candidates to choose from."

Swanson began recruiting more than a year ago for the Seattle office as the company was expanding another CRE office in Portland, Ore. He is also looking to fill out a team in the Bay Area surrounding San Francisco by the first quarter 2012.

This is a slight shift for Umpqua which is known more for its retail powerhouse in having interactive "stores" rather than traditional branches. The company made CRE loans previously but it was handled within the entire commercial loan department.

"You really have to have a group that just becomes dedicated to doing that [CRE] versus someone doing a variety of lending, including CRE," Swanson says. "It helps us build relationships and credibility within the bank" amongst internal credit review experts.

Umpqua is targeting loans ranging from $5 million to $15 million. But Swanson says they have financed larger projects through "club deals" or what's known as syndicates. Umpqua formed a debt-capital markets group to seek out other banks willing to split the financing on larger projects.

While many banks in the Northeast have already revved up CRE lending, it's a positive sign that some are now trying along the West Coast, where there are more markets badly bruised by the real estate collapse.

"Today's probably a good time to make CRE loans," says Alvin Kang, president and chief executive of the BBCN Bancorp Inc. in Los Angeles, created by the merger of Nara Bancorp. and Center Financial Corp.

Before the Nov. 30 merger, about 73% of Nara's loan book was tied to commercial real estate. Center lowers that percentage by adding its small-business portfolio. Still, Kang is adamant about continuing to grow CRE loans. CRE is "such an important part of our balance sheet that we're not going to let that run off. That doesn't make sense," Kang says.

Washington Federal also had a pre-existing commercial real estate division but the $12.3 billion-asset company's Friday purchase of the failed Western National Bank boosted its CRE concentration in Phoenix.

"We weren't as deep [into CRE] as other banks were when the crisis happened … but there have been opportunities for us since," says Jack Jacobson, Washington Federal's executive vice president of commercial real estate.

Rabatin says he expects more thrift companies such as Washington Federal to become "fairly competitive" in CRE as they look to diversify their balance sheet s away from mortgages, especially now that they're regulated by the Office of the Comptroller of the Currency.

Jacobson says his company's new regulator had nothing to do with the timing of the CRE expansion. Rather, it's due to timing the improvements in the economy of certain markets like Seattle, Portland and hopefully.

"Each market is recovering at a different rate," Jacobson says. The Phoenix "market is bumping along the bottom at this point in time so it's more of a timely opportunity."

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