A bad situation for local banks is rapidly getting worse.

Lending conditions in L.A.’s commercial real estate markets deteriorated significantly in the third quarter as the likelihood of defaults grew, according to a leading index.

The Commercial Real Estate Lending Index by Banc Investment Group showed that the strength of each real estate sector tracked – retail, industrial, multifamily and office – declined during the quarter.

Chris Nichols, chief executive of the San Francisco firm, the capital markets subsidiary of Pacific Coast Bankers’ Bancshares, said a lack of investor demand has particularly hurt the industrial and retail sectors.

“We still have too much supply out there, not enough demand,” he said.

The forward-looking index, which reflects the strength of each sector and takes into account the likelihood of loan defaults, compares lending conditions today with a baseline period, set in the second quarter of 2007 with an index value of 100.

Industrial was the weakest sector in the third quarter, falling 11 percent to 33.82. The largest decline, however, came in the retail sector, which dropped 18 percent to 47.50.

Many bankers expect a surge in commercial real estate loan defaults in the coming months, which could be difficult for community and regional banks already reeling from souring construction and residential mortgage loans.

A recent Business Journal analysis found that banks headquartered in Los Angeles County have nearly $30 billion in commercial real estate loans on their books, constituting 40 percent of their overall portfolios – nearly three times the national average.

According to data from the Federal Deposit Insurance Corp., the percentage of noncurrent commercial real estate loans at local banks exceeded 4 percent in the third quarter. Indeed, in Los Angeles, which had one of the most overheated real estate markets, conditions are particularly bad, Nichols said.

“(Los Angeles is) performing worse than the nation almost across the board,” he said.

Private Placement

After similar moves by several of its local competitors, Center Financial Corp., the Koreatown parent of Center Bank, has raised capital through a private placement of stock.

Executives said the placement, which raised $12.8 million, was oversubscribed.

“The additional capital strengthens our liquidity position ahead of a slow, but positively trending economy; ensures that we have adequate capital to address potential future impacts from the weak economy; and supports future growth,” said Chief Executive J.W. Yoo in a statement.

Recently, a number of local Korean-American banks have raised capital, including Nara Bancorp Inc. through a common stock offering and Hanmi Financial Corp. through a private investment.

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