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SAN FRANCISCO- Banks are planning to maintain or grow their commercial real estate loan portfolios in the second half of 2003 despite tightening their underwriting standards, according to a just-released survey conducted by San Francisco-based Bridger Commercial Funding that reflects the opinions of loan officers and senior management from 80 commercial banks across the nation.

Eighty-six percent of respondents foresee their banks’ commercial real estate lending volumes either remaining level or rising for the rest of the year. The percentage is similar to the results of the first-half survey, though a larger percentage of respondents in this latest survey anticipated rising loan volumes. Similarly, 34% of bankers surveyed expressed bullishness about the sector, up from 27% at the beginning of 2003.

The higher volumes will occur despite tightening underwriting standards. About 55% of survey respondents indicated that their institution’s underwriting standards tightened to some extent during the first half of the year. “While their lending spigots are open, banks are illustrating discipline about the new loans they’ll book,” says Bridger SVP Peter Grabell. “In both of our 2003 surveys, 70% of the bankers indicated their banks are selectively building their loan portfolios, which is favorable for borrowers. It suggests that commercial real estate is performing relatively well, and that bankers want to provide debt capital.”

As for bad debt, 88% of those surveyed reported delinquency levels below 1%. Survey respondents cited multifamily (84%), retail (77%) and warehouse/industrial (70%) as the strongest performing property types, distantly followed by office (41%) and lodging (16%).

“We were somewhat surprised by the relative strength bankers saw in retail and the continued weakness in the lodging sector,” adds Grabell. “We expected adverse tenant credit issues to have more of an impact on retail than has evidently been the case. But perhaps the strong sales figures that most retailers reported in July suggest that economic recovery is finally at hand.”

Grabell says his firm also expected that hospitality properties might show signs of improvement since new construction has been so limited for the past two years. “But the bankers are indicating that concerns about the sector nonetheless remain,” he says. “The weakness reported in the office sector validates the secondary market’s outlook, where the ability to underwrite loans on office buildings has been negatively impacted by higher vacancy rates and declining rents.”

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