A Contrarian Now Wants To Lend On CRE

Todd Maclin, J.P. Morgan Chase & Co.’s (JPM) commercial-banking head, saved the bank from the commercial real-estate crash by pushing J.P. Morgan to sharply cut back on lending while competitors made ” crazy” loans.

Now Maclin has had a change of heart.

J.P. Morgan is lending again to commercial real estate. Vacancies are falling and rental rates are rising, driving demand for new loans. And much of the competition still can’t stomach the idea of making new loans, allowing J.P. Morgan, along with Wells Fargo & Co. (WFC) and PNC Financial Services Group Inc. (PNC), to provide new loans with little competition.

“There hasn’t been a lot of new development and activity,” Maclin says. “That has led to some improvement” in lending terms.

The commercial real estate collapse was “the dominant reason for the high number of bank failures since the beginning of 2008,” the Federal Reserve’s director of banking supervision and regulation, Patrick Parkinson, told Congress recently. While Parkinson said worst-case scenarios appear less likely than last year, he warned banks aren’t even halfway through losses.

In some states, there’s a moonscape of empty office parks, rental complexes and craters in the ground. Nearly 10% of commercial real-estate loans are delinquent.

Banks are shedding assets: Huntington Bancshares Inc. (HBAN), KeyCorp (KEY) and SunTrust Banks Inc. (STI) are paring loans in this area. Bank of America Corp. (BAC) is significantly reducing operations.

For J.P. Morgan and those other strong banks, that pullback spells opportunity. J.P. Morgan, for instance, bought a $3.5 billionCitigroup Inc. (C) portfolio in August.

Wells Fargo and PNC, as two of the top originators, are also increasing lending. Wells Fargo said it kept lending conservatively through the crisis; Ed Blakey, head of Wells’ specialized lending, says deals today are much easier and originations are up, particularly because it’s No. 1.

A PNC spokesman says it continued lending to qualified borrowers and is growing.

Both are in good shape overall, and both are larger than J.P. Morgan in commercial real estate lending.

What makes Maclin, a 31-year veteran of J.P. Morgan, stand out, was his willingness not to make loans for years, while competitors seemingly piled up profits.

Chief Executive Jamie Dimon says Maclin and the commercial bank did an ” outstanding job navigating the treacherous commercial real estate market.”

From 2005 to 2009, national commercial real-estate loans outstanding grew 55% to over $1.7 trillion. Wells Fargo, and Wachovia Corp., which Wells bought, were consistently the top originators, according to the Mortgage Bankers Association.

J.P. Morgan shrank. From 2004 to 2007, the commercial bank slashed its real- estate exposure from about $20 billion to about $7 billion.

Speaking in early 2008, Maclin explained that real estate can generate high returns and “above average problems.”

Maclin, who sits on the bank’s operating committee advising Dimon, now says his team was avoiding “crazy” underwriting.

“I can’t sit and tell you that we saw the end of the cycle better than others, ” Maclin says. “We just looked at the individual deal … and said no.”

Now J.P. Morgan is saying yes. The push is being led by Al Brooks, head of commercial term lending, and Tom Lawyer, head of commercial real-estate finance who recently came from Citigroup.

They particularly like multi-family apartment projects in expensive cities because they think owning a home is too expensive there, so more people will rent. They’re lending to apartment construction and some office space. Retail and hospitality, they say, remain uninteresting.

Brooks and Lawyer have about $5 billion in loans in the pipeline, about $1 billion of which is new construction. The commercial bank’s loans total $97 billion.

The industry’s new-found confidence comes partly from stricter loan terms. Maclin says full recourse isn’t uncommon and “Mickey Mouse” terms aren’t happening.

J.P. Morgan and Wells Fargo both say loans are now based on actual rents, not speculative increases.

With a third of all outstanding loans, nearly $1 trillion, coming due in the next two years, strong banks will get more opportunities. Wells and J.P. Morgan say competition is emerging.

That’s one reason J.P. Morgan remains cautious. Competition will eventually short-circuit smart lending, and Maclin will someday go back to being a contrarian.

“We’ve seen this movie before,” Maclin says. “As encouraging and positive as it is, we know there is going to come a point in the future when the circuit breakers are hit.” (credit d.benoit, dowjones)