The U.S. banking industry finally has turned the comer on commercial realty lending problems, and loan demand is resurfacing in several regions.

According to an American Banker survey, the 100 top commercial real estate lenders among U.S. banks posted a 39% reduction in delinquent realty credits in 1993, accompanied by a 41% drop in chargeoffs.

Although severe contractions among the very largest lenders fueled a 6% drop in total commercial real estate loans among the top 100, the industry overall sustained a modest 0.5% contraction, indicating smaller institutions are picking up where the larger ones are leaving off.

Stability, Even Vitality

The upshot is that for the first time in years, the commercial realty market is exhibiting stability and, in several regions, even some vitality. "It's a lot more fun to come to work," said Gene D. Clark, a senior vice president at First Union Corp., Charlotte, N.C.

To be sure, many banks remain focused on reducing commercial realty lending operations.

Chase Manhattan Bank, for example, last year posted a 50% reduction in commercial realty loans outstanding, accompanied by a 71% reduction in delinquent realty credits. First National Bank of Chicago cut its portfolio by 37%, and bank officials do not foresee a material expansion anytime soon, citing a determination to avoid the markets that caused them so much grief.

"We no longer are involved in project lending on a national basis," said Daniel A. Lupiani, head of realty finance at First Chicago Corp.

Moreover, not all portfolio cleanups are completed. In the Golden State, for example, Bank of California at yearend was wrestling with a 22.05% ratio of delinquent credits to total commercial realty loans, while BankAmerica

Corp.'s lead bank had a 14.67% delinquency ratio.

In New York, Bankers Trust Co. had a 21.93% commercial realty delinquency ratio. The figure was 20.04% at Chase Manhattan Bank, and 18.44% at Citibank. Still, some favorable trends are apparent:

Although long-term rates rose in the first quarter, they remain sufficiently low to fuel housing starts, provide refinancing opportunities, and facilitate sales of performing and distressed properties. And what's taken away by rising rates could be restored by rising demand.

"Low rates are driving the market, and economic growth could offset whatever negative effects rising rates could have," said William H. Queenan, chief credit officer at Norwest Corp., Minneapolis.

On top of this, housing demand is surging, especially in rebounding states such as Florida, Texas, Arizona, and Colorado. Many top lenders say they are finding opportunities in providing residential development and construction financing, even in New England and California.

"Residential markets are picking up, not only in New England but across the country," said Denise Delaney, a realty division executive at Bank of Boston Corp.

And the availability of long-term financing is increasing, as insurance companies, pension funds, and real estate investment trusts open their conduits. While some of these players are taking business away from banks, they often are a big help in getting risky interim construction loans off the books.

This added liquidity makes for "a very healthy situation," said Stephen A. Luedecker, who heads one of two commercial realty loan groups at Comerica Bank-Detroit.

A Look at Discrete Markets

In designing its 1993 survey of commercial realty lending, the American Banker bypassed the bank holding companies and sorted the industry by bank charter, identifying the 100 institutions with the largest holdings of commercial realty loans at yearend.

What's gained in this approach is a better sense of activity in discrete markets. The survey shows, for example, that NationsBank of Tennessee boosted commercial realty loans by 14.13% last year, while NationsBank of Georgia saw its portfolio contract by 21.9%.

What's sacrificed in this approach is aggregate information on regional banking companies.

For example, Bank of Boston Corp. held $3.7 billion of commercial realty credits at yearend, with less than half that amount booked at First National Bank of Boston, which is the only one of its subsidiaries appearing in the survey.

And because of the dispersion of commercial realty credits at farflung Norwest Corp., none of its banks appear in the survey, even though the parent company in aggregate holds a hefty $2.8 billion of commercial realty loans.

The brightest reports on commercial realty are emanating from the Southeast and Southwest.

Donald Inscoe, associate director of the division of research statistics, Federal Deposit Insurance Corp., said this in part is attributable to rebounds from depressed conditions of a few years back.

The federal government spent tens of billions of dollars bailing out depositors and collecting on defaulted loans at failed banks and thrifts in Arizona, Florida, and Texas. It has taken time for populaces to regain confidence and for acquirers of failed units to gain control of franchises and market knowledge.

Residential Construction

But the transition period is apparently is over. Bank One Arizona posted a healthy 31.15% commercial realty expansion in 1993, for example. First Union National Bank of Florida grew commercial realty loans by 16.48%, and NationsBank of Texas grew by 24.77%. Much of this activity is centered on residential construction.

Indeed, home construction financing is cited as a major growth area for bankers in most areas of the country, including California. John L. Gray, head of realty lending at First Interstate Bank of California, said prices of improved residential lots are rising "dramatically" in some areas, giving evidence of a reviving market.

However, a near-universal theme sounded by bank lenders is that the market for commercial office buildings will remain soft. In California, for example, "it is hard, with so many vacant buildings, to justify putting up something new," said Kenneth G. Edwards, head of commercial realty lending at Bank of America National Trust and Savings Association, the lead bank of BankAmerica Corp., San Francisco.

Owner-Occupied Structures

Still, bankers report continuing opportunities to finance owner occupied structures, including offices, warehouses, and manufacturing facilities. First Chicago, for example, is providing $22 million of construction financing for a Sony Corp. facility in Los Angeles.

Such projects "are built with a lease in hand," said Mr. Lupiani, and pose far less risk than do properties constructed on speculation that tenants will materialize. Mr. Queenan said Norwest especially emphasizes this type of lending and has "a good pipeline" of deals.

Refinancing is cited as another major thrust of commercial lenders. National City BankCleveland, for example, is "aggressively" wooing business away from thrifts and life insurance companies, said realty division head Kenneth M. Goetz.

Though rates have been nudging up, bankers in many regions of the country foresee continuing refinancing opportunities. At the same time, few are optimistic about balance sheet growth.

Although prospects for growth are brighter in the Southeast, so too is competition from nondepository institutions, said Mr. Clark of First Union. "Competition is severe, and it will only get worse," he said.

Of course, balance sheet growth would be a tough proposition anyway, given the unbalanced nature of the commercial realty recovery. Refinancing has helped many projects survive, but market fundamentals remain weak. So softness in commercial construction and land development is expected to persist.

Beyond questions of growth are questions of preference. After the colossal commercial realty losses of the past five years, bankers say they are highly cognizant of the dangers of oversupplying the market with credit, and of taking large positions in speculative projects.

"Banks don't want to write checks for $100 million," said Ms. Delaney of Bank of Boston, who said she welcomes the growing trend of securitization. "We'd all rather have pieces [of loan pools] that are rated and liquid, as opposed to holding single-project loans."

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