Lenders Warm To Commercial Real Estate

November 04, 1994|By David Conn | David Conn,Sun Staff Writer

Commercial real estate, which nearly killed Maryland National Bank and other mid-Atlantic lenders when it collapsed in the late 1980s, is coming back. And while bankers in this area are still shy from being burned on development loans, they find themselves once again attracted to the flame.

Signet Banking Corp. is one of those lenders, but this time around the Richmond, Va.-based company is taking an important precaution. The company, whose subsidiary Signet Bank/Maryland is based in Baltimore, has established a new division to make commercial real estate loans, while exposing itself to very little of the risks of default.

The company has a new group to originate long-term commercial mortgage loans, pool them and sell them as securities.

The process, known as securitization, is a well-established practice in the residential mortgage industry. In the last few years, lenders and investment bankers have created a growing market for securities backed by commercial real estate.

Signet's new group also will offer its services -- both lending and financial management -- to real estate investment trusts (REITs), which are publicly traded companies that manage portfolios of commercial properties.

"There is a tremendous shift toward the capital markets in both the financing and ownership of commercial real estate loans," said Kevin B. Cashen, a senior vice president who heads the new Washington-based capital markets group at Signet.

That shift is illustrated by the rise in the supply of commercial loans sold as securities. Since 1991, when the commercial mortgage-backed securities market amounted to $8.6 billion, the industry has grown to a projected $21 billion this year, according to Merrill Lynch.

Signet doesn't want to miss the boat. By making these loans and selling them to third-party investors, the company need not ignore a large business segment in this region, namely real estate developers; it doesn't have to retain the loans on its books; and it can generate fees both for originating and servicing the loans even after they're bundled into securities and sold.

Mr. Cashen, a 33-year-old Baltimore resident, said his group will be picky about the loans it makes. The company is looking to refinance existing properties with at least three years of strong operations. The loans, between $1 million and $10 million, will carry seven- to 15-year mortgages.

Because new capital requirements make it more difficult for insurance companies to keep real estate loans in their portfolios, many existing loans will be coming to market in the next few years, Mr. Cashen said. Merrill Lynch estimates that an average of $160 billion in commercial mortgages with "balloon payments" will come due in each of the next three years.

Signet plans to enlist the help of Wall Street investment bankers to do much of the paperwork and marketing of the securities, Mr. Cashen said. And until Signet is able to generate a "critical mass" of loans, it probably will hire an outside contractor to service them, he said.

The move makes sense for several reasons, according to banking and real estate specialists. "It's their way of announcing that they're getting back in the real estate market, because they have been loath to do that," said Stuart Greenberg, a private banking consultant in Baltimore.

"They're afraid that if they can't offer a full range of services to a client that needs them, that client will go elsewhere," Mr. Greenberg said.

The other aspect of Mr. Cashen's new business is lending to real estate investment trusts. The industry is hot now, as evidenced by the large number of REIT stock offerings in the last two years, according to Robert A. Frank, who heads Alex. Brown Inc.'s real estate research group.

"It kind of makes sense for the banks to lend to REITs on a corporate basis," Mr. Frank said. That's because such loans are better secured than loans on the underlying real estate properties, and they require banks to add less reserves to their capital, Mr. Frank said.

But others said the venture is not without risks, especially if Signet is unable at first to generate enough loans to sell to others and must keep loans on its books. Mr. Cashen said there are enough investment bankers who are willing to buy even one loan at a time, to add to their own pools of mortgages. But that reduces the fees Signet can earn from this business.

And some wonder whether Signet, and other banks, have learned any lessons from their real estate lending binge of a decade ago. "One of the concerns that I have with lenders jumping into the commercial mortgage securitization business is that they're [using] the same infrastructures which originated loans which didn't live up to expectations [in the late '80s]," said Richard A. Jacobs, managing director of Legg Mason Wood Walker Inc.'s real estate capital markets group.

"If they try to apply those same standards to capital markets, it isn't going to work," Mr. Jacobs said.

Finally, established players such as Legg Mason and Alex. Brown are already in the market, in one way or another, Mr. Jacobs said. Insurers are starting to compete for the loans as well, and some commercial banks, including NationsBank Corp., are gearing up to enter the market without any help from outside securities firms, according to R. B. Diffenderffer Jr., a senior vice president who heads NationsBank's real estate group in the Baltimore-Washington area.

"I think the strategy is right to lend in your own market," Mr. Jacobs said of Signet's new venture. "But there's a lot of competition."

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