Demand may loosen U.S. commercial property lending

NEW YORK, June 15 (Reuters) - U.S. commercial real estate lenders are starting to loosen standards on loans hoping to win deals, setting up a potential clash in the market still besieged by falling values and property revenue, an insurance executive said on Tuesday.

The intense competition between insurance companies and investment banks to make loans may soon lead to a decline in loan quality, Mark Davis, a senior managing director at Allstate Investments LLC, told Reuters after a panel sponsored by the Commercial Real Estate Finance Council.

"I don't think underwriting has eroded significantly so far. So I think the quality of loans that has gotten done is still good. But I'm concerned when I see the trend that people are being very, very competitive for loans," Davis said.

One of the biggest U.S. lenders at the conference suggested his group is now going through a "rationalization" of whether to take more underwriting risk. If the market is bottoming, easing underwriting guidelines on properties with slightly more debt can make sense, the lender said.

Loans in a JPMorgan Chase & Co (JPM.N) commercial mortgage-backed security (CMBS) last week were seen as somewhat more aggressive than the few previous CMBS issued since late 2009, according to analysts. CMBS are investments secured by loans on office, retail and apartment buildings.

The two views mark a key debate about the commercial market, where defaults are expected to exceed 10 percent due to tight financing and as rental income needed to pay debts remains soft.

The sector's health is important for the overall economic recovery, and has been backstopped by an emergency federal lending program.

In April 2010, the delinquent unpaid balance for CMBS increased by $3.6 billion to $54.65 billion, according to Realpoint, a research and ratings firm. Overall, the delinquent unpaid balance is up almost 219 percent from a year ago and is now more than 24 times the low point of $2.21 billion in March 2007, it said.

Despite the delinquencies, some believe the worst is over, and cite the presence of billions of dollars in investor cash desperately seeking high-yielding assets.

Investors hoping the recession would bring a flood of assets at distressed prices have been disappointed, and left to look for other places for low-yielding cash.

Loans on many properties with excessive debt and weak cash flow have been extended as investors hope that improved real estate and capital markets will bring a less costly resolution.

Holding back some investors are billions of dollars in older, troubled, commercial loans, Davis said. Given the magnitude of losses by institutions over the past two years as well as weak fundamentals, the money flowing to the market is "shocking," he said.

"Most institutions are still holding a significant amount of legacy assets that have to be dealt with in one way or another. So when you add up all those factors, that's why I'm always surprised at how quickly the money has come back to the market," he said.

One explanation for the investment demand is the greater number of current players versus the period after the commercial property trough in the mid-1990s, he said. (Editing by Jeffrey Benkoe)