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    Red flags follow commercial real estate lending’s fast rise

    Commercial deals in Boston area stir talk of ’80s bubble

    The 25 largest banks based in Greater Boston have increased commercial real estate lending nearly 40 percent over the past three years.
    DAVID L. RYAN/GLOBE STAFF/FILE
    The 25 largest banks based in Greater Boston have increased commercial real estate lending nearly 40 percent over the past three years.

    Local banks in search of bigger returns are rushing to grab a slice of Boston’s soaring commercial real estate market, lending at a pace not seen since the boom of the late 1980s and raising concerns among bankers and analysts that another bubble is in the making.

    Flush with money from growing deposits, stock offerings, and healthy cash reserves, the 25 largest banks based in Greater Boston have increased commercial real estate lending nearly 40 percent over the past three years, more than double the national increase of 16 percent , according to SNL Financial LLC, a Virginia research firm.

    At Blue Hills Bancorp Inc. of Hyde Park, commercial real estate loans ballooned to $332 million in the second quarter of this year, up from just $2 million in the same period in 2011.

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    Industry officials say the competition for deals is so fierce that many banks are relaxing lending standards, allowing developers to put up far less of their money to get financing. Many banks also are waiving standard protections such as requiring developers to personally guarantee loan amounts beyond the value of the property.

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    “There’s nothing looming that says there’s a catastrophe,” said Darryl Fess, senior vice president for commercial real estate at Brookline Bancorp Inc., “but there are warnings.”

    Banks last piled into the Boston commercial real estate market with such zeal in the mid-1980s, when rents were climbing, interest rates were relatively low, and developers, lenders, and investors were bubbling with optimism about the region’s technology-driven economy, industry officials said. By 1990, with minicomputer companies like Wang Laboratories and Digital Equipment Corp. collapsing, Massachusetts was plunged into the state’s deepest recession since the end of World War II, worse here even than the so-called Great Recession of a few years ago.

    Banks failed, condominium projects were halted, and office towers stood vacant. Financial analysts led tours of abandoned buildings and half-finished projects around New England, looking for investors to pick up distressed properties at bargain prices.

    “There was a lot of optimism, there wasn’t a recognition that people were all doing the same thing,” Lynn E. Browne, a retired executive vice president of the Federal Reserve Bank of Boston, said of the overbuilding and overlending of that era. “The consequences were very painful for the banks.”

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    Over the past few years, national banks, insurance companies, pension funds, and foreign investors have pumped billions into Boston real estate in search of a safe bet with modest returns. That has helped send office and condominium values soaring and cranked up the cranes dotting the city’s skyline.

    Now, small Massachusetts banks that long have stuck to home mortgages are gobbling up more loans for multifamily projects, commercial properties such as office buildings, and construction, looking for higher returns and bigger profits a time when there are few other options. Residential real estate lending, hampered by spotty sales and low inventories of homes on the market, hasn’t increased significantly. Mortgages also have higher costs for banks, in part because of regulations put in place following the foreclosure crisis, and lower profit margins.

    Meanwhile, the demand for traditional business loans to expand companies has been less robust as firms remain cautious amid global economic uncertainties, from China to Europe to the Middle East.

    And with 10-year Treasuries yielding just over 2 percent, the 4 to 5 percent paid by commercial real estate loans has become increasingly attractive.

    “There is certainly more money chasing deals than there was even a year ago,” said Gerard Nadeau, executive vice president of commercial lending at Rockland Trust, the state’s second-largest community bank.

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    Rockland Trust and its parent company, Independent Bank Corp., were among the lenders battered in the recession that followed the building boom of the 1980s, prompting them to sound warnings recently about the rush to finance luxury apartment, condominium, and office projects. Rockland’s loans to commercial properties have grown 27 percent in the last three years. During that time, its loans to multifamily projects have grown 42 percent, and its loans to construction have grown 56 percent.

    ‘We are concerned . . . that we could be reaching a point where valuations are at their peak, and the only place for them to go is down . . . I think the risk is high in that.’

    Gerard Nadeau, Rockland Trust executive vice president of commercial lending 

    At the biggest local banks, combined loans for multifamily developments surged 73 percent over the past three years, compared with 20 percent nationally, according to SNL Financial. Construction loans jumped 64 percent, compared with 21 percent nationally, and commercial real estate loans 34 percent, compared with 12 percent nationally.

    “We are concerned, there certainly are some signals at least, some red flags, that we could be reaching a point where valuations are at their peak, and the only place for them to go is down,” Nadeau said. “Have we reached that turning point? Perhaps. I think the risk is high in that.”

    The Federal Reserve has noted the rise in commercial real estate values and is monitoring the pace of building throughout the nation, said Brian Bailey, a senior financial policy analyst with the Federal Reserve Bank of Atlanta conducting sessions on commercial real estate with bank examiners across the country, including Boston. He said he is more concerned about overbuilding in the Southeast and other markets than in Boston. “The underlying principles are mostly positive, and that’s why we’re seeing more activity,” Bailey said.

    Many local bankers and commercial real estate specialists say the Boston market has room to climb, citing the strong and diverse economy built on life sciences, technology, and top-tier universities. Just a few years ago, they note, two or three Boston area lenders might have vied to make a commercial real estate loan; today, a bank might have to beat out 10 other competitors.

    Blue Hills Bank started increasing its commercial portfolio before the bank launched an initial public stock offering that raised about $278 million last year. The Boston area is growing, said William Parent, the chief executive, and Blue Hills is seeking opportunities to expand.

    Still, Blue Hills remains careful about where it lends, Parent said, focusing more on suburban markets and less in downtown Boston, where values have soared and competition is intense.

    The bank still requires developers to commit capital to the project, he said, unlike in the late ’80s, when some banks offered 100 percent financing. But in this lending environment, Parent said, banks can’t demand conditions such as personal guaranties from developers.

    “If you had eight bank CEOs in a room,” he said, “we could probably each point to one deal that the other had done and would say, ‘I wouldn’t have done that deal.’ That tells you the market is aggressive.”

    Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.