Commercial real estate is slowly making a comeback, but banks are being more cautious

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Mikayla Whitmore

Construction continues on a medical project being financed by Meadows Bank on June 19, 2015 in Las Vegas. The project site is on Wigwam Avenue just east of Eastern Avenue.

Mon, Jun 29, 2015 (midnight)

Las Vegas bankers couldn’t write loans fast enough during the real estate bubble, doling out funds for construction projects even if borrowers didn’t have a way to pay them back.

Today, after the massive real estate bust, waves of bank failures and the worst recession in decades, that spigot is merely dripping.

Southern Nevada’s banks have drastically cut back on construction and development lending since the market tanked. They’ve boosted profits and overall lending, but when it comes to real estate development, bankers aren’t opening the vault nearly as often as they did during the go-go years last decade.

“We’ve all kind of stayed away from that,” Meadows Bank CEO Arvind Menon said.

Clark County’s six remaining small, locally based community banks — lenders with just one or a few locations — had a combined overall loan portfolio of about $757 million by the end of the first quarter. Construction and land development loans comprised $54 million, or 7 percent.

By comparison, during the first quarter of 2009, when the economy was nosediving, their total lending stood at $440 million, with development funding at nearly $143 million, or 32 percent of all loans, according to the Federal Deposit Insurance Corp., a banking regulator.

Those numbers — a snapshot of loans outstanding — do not include the much larger Nevada State Bank. Its total loan portfolio has dropped 23 percent since early 2009, to $2.3 billion — and its development financing has plunged 89 percent, to almost $101 million by first quarter’s end, according to the FDIC.

Las Vegas banks are not alone, as lenders have been scaling back construction financing in other parts of the country that also were hit especially hard by the real estate bust.

“This is very much a regional issue,” said Michael Natzic, senior vice president of the community bank group at Los Angeles-based Crowell, Weedon & Co., a stock brokerage and money management firm.

A big reason for the drop here: Unlike during the boom years, bankers are steering clear of speculative development.

Local executives say they’ll fund projects only if developers already have lined up tenants. Securing paying customers in advance improves the odds of being able to pay off the loan, which borrowers frequently failed to do after the bubble burst.

Menon said his bank — by far the biggest of Las Vegas’ smaller, hometown lenders, with $467 million in assets — “will not touch” speculative developments. Neither will Kirkwood Bank of Nevada, the smallest of the pack with $69 million in assets.

Unless a project is preleased, “we wouldn’t do new construction,” said Kirkwood chief credit officer John Dru.

“Bankers are a lot smarter now, and customers are too,” Dru said.

Regulators also have pressured banks to rein in such lending. Sinking under bad development loans, banks failed nationwide during the recession, and financial regulators cracked down on funding to ensure banks wouldn’t put themselves at risk of collapsing again.

“They’re still watching them very closely,” Natzic said.

Local community banks still devote most of their lending to real estate deals, but they seem to be writing mortgage loans more often than funding construction.

In early 2007, Nevada State Bank devoted 35 percent of its loan portfolio to construction and development deals. By early this year, it was down to 4 percent, according to FDIC data.

The bank has shifted to commercial-property mortgages and other business-focused lending, said Jeff Jenkins, executive vice president and statewide real estate lending manager.

“We’re trying to grow the book in a more balanced fashion than what’s been done in the past,” Jenkins said.

Borrowers still have plenty of options for finding loans, as Southern Nevada’s community banks are minuscule compared with the likes of Wells Fargo Bank and Bank of America. Meadows, for instance, has only four branches — two in the valley — and $402 million in total deposits. Wells Fargo, with 80 branches in Clark County and $12 billion in local deposits, has about 6,300 branches nationally and $1.2 trillion in total deposits, according to the FDIC.

Developer Doug Roberts, who recently broke ground on two local speculative warehouse projects, said financial giants such as JPMorgan Chase Bank and Bank of America are issuing construction loans in the valley.

Lenders are more disciplined, though, requiring far more cash up front than they did during the bubble. Back then, banks would finance 80 to 85 percent of a project’s construction costs. Now, they’re down to about 55 percent, said Roberts, a partner with Panattoni Development Co.

Though still a shadow of what it was during the bubble, construction has picked up valleywide over the past few years. Most of the work involves tract housing, apartment complexes and warehouses.

In June 2006, around the height of the real estate bubble, 112,000 people in the Las Vegas area worked in construction. That plunged 69 percent to 34,800 workers in early 2012, according to the Associated General Contractors of America. Today, about 50,400 people work in construction locally, up 45 percent from the depths.

One project that received funding this year is a planned two-story, roughly 60,000-square-foot skilled nursing facility on Wigwam Parkway at Eastern Avenue. Meadows issued the developer, Tower Realty & Development, a $10.8 million loan, county records show.

Owned by brothers John and Louis Carnesale, Tower already has lined up a tenant to operate the facility. Construction crews are doing site work, and the building is expected to open next year, said Barry Lindemann, an asset manager at Tower affiliate Taylor Financial.

Lindemann said he probably “knocked on 10 different doors” to secure a lender. He praised Meadows, saying the bank made the underwriting process as easy as possible. In general, larger banks might offer better loan terms but have more bureaucracy than community lenders.

“If you can get it done faster, you’re not wasting money sitting around trying to fund a loan,” Lindemann said.

Backed by easy money, Las Vegas developers built at a frenzied pace during the go-go years, flooding the valley with office buildings, retail centers, warehouses and other properties.

The industry was all but wiped out during the recession, with widespread bankruptcies, foreclosures, vacancies and abandoned construction projects.

Financial regulators, amid waves of bank failures nationally, shut down six locally based banks from fall 2008 to spring 2011. Others almost failed, and practically every hometown lender that remained alive was losing money.

The first to collapse, Silver State Bank, also was the largest to go under. It had almost $1.9 billion in assets, 12 branches in Southern Nevada and four in Arizona, and sales offices in seven states.

The bank grew rapidly along with Las Vegas, more than tripling the size of its loan portfolio between late 2004 and June 2008, to $1.6 billion.

Regulators shuttered the bank in September 2008, 12 years after it opened. Silver State’s receiver, the FDIC, sued former CEO Corey Johnson, former Executive Vice President of Real Estate Lending Douglas French and two ex-loan officers in 2012. The agency sought to collect more than $86 million in damages tied to losses FDIC officials said were caused by the defendants’ “gross negligence” on numerous real estate loans. The lawsuit recently was settled, court records show.

In 2013, a lawyer for Johnson told VEGAS INC that Silver State’s failure wasn’t his client’s fault.

“It was exclusively the economy,” he said.

The FDIC’s Office of Inspector General, however, blamed the bank’s demise on sloppy real estate lending. In a 2009 report, it said Silver State failed primarily because of management’s “high-risk business strategy.” Executives pursued aggressive loan growth, concentrating in higher-risk commercial real estate loans and had “weak risk management practices and controls,” the report said.

In late 2004, construction and development lending comprised 21 percent of Silver State’s loan portfolio. By June 2008, it had ballooned to 67 percent of all loans, according to the report.

The second-largest to fail, Community Bank of Nevada, closed in 2009, 14 years after it opened.

Management dumped money into Las Vegas real estate projects, helping the bank grow at a rapid clip. It suffered heavy losses when the local economy started to crumble, but executives said they were sure it would turn around. Examiners, however, found that bank management had “a ‘lethal sense of optimism’ regarding the resilience of the Las Vegas market” and “failed to identify and quantify the magnitude of risk” in its real estate-heavy loan portfolio, according to the Federal Reserve’s Office of Inspector General.

Commercial buildings emptied out as companies laid off workers en masse or shut down altogether. With little demand for new space and practically no money being offered to build, construction largely ground to a halt in Las Vegas.

“There was really no need to build another building,” Jenkins said.

Today, Las Vegas’ commercial property market is stronger, but some sectors are healthier than others.

The warehouse market in particular has gained speed over the past few years, with developers breaking ground on several projects, and landlords signing more tenants and raising rents.

Retail got a major new player last fall with the opening of Downtown Summerlin, the once-mothballed 106-acre shopping and office complex near Red Rock Resort. But overall, shopping-center vacancy rates remain largely unchanged over the past year and rental prices are sliding, according to Colliers International.

The office market has been slowest to recover. Landlords are signing more tenants and raising rental prices a bit, and construction plans are picking up, with a dozen mostly small to medium-size projects in the development pipeline. But the market’s vacancy rate hovers around 19 percent, roughly twice that of industrial and retail, according to Colliers.

Overall, lenders have noticed an upswing in competition among banks for construction loans and a bump in requests from prospective borrowers. Community bankers expect development lending to stay flat or to tick higher, though no one is forecasting a surge of deals.

“It’s going to go up, (but) it’s not going to be enormous,” Bank of George CEO T. Ryan Sullivan said.

Local banks are far healthier today than they were during the worst of the downturn. They’ve charged off huge amounts of soured loans, sold foreclosed properties and boosted earnings.

And even though bankers are avoiding speculative construction projects, at least one lender may not be surprised if they eventually pile back in.

“We all learned a lesson,” Menon said. “But they do say that bankers have short memories, so who knows?”

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