Local credit unions are beginning to return to commercial real estate lending, a business line that was all but abandoned by many lenders during the recession.

Lockheed Federal Credit Union, the second largest credit union in Los Angeles County, began offering commercial real estate loans last week for the first time since 2006. The move comes just months after Kinecta Federal Credit Union, the largest, resumed real estate lending after a yearlong hiatus.

While many commercial banks remain hesitant to expand their loan portfolios due to regulatory pressures and a continued perception of risk, the return of the county’s two biggest credit unions to the marketplace will likely encourage its competitors to do the same.

“As we’re seeing this stability set in now in 2011, credit unions are feeling more comfortable branching out or expanding the lines of business that are available to them,” said Daniel Penrod, an analyst for the California Credit Union League, an industry trade group.

While credit unions have not historically been major players in commercial real estate financing, a number of larger institutions have offered loans of as much as a few million dollars to acquire office buildings, retail stores, apartment buildings and other large projects – though they tend to stay away from complex or unusual properties.

However, some analysts are concerned that credit unions, despite a conservative reputation, may be taking on more risk than is prudent by venturing into a commercial property market that they believe remains unsettled. The market is still suffering from a combination of high unemployment, falling property values and tightened lending standards, resulting in widespread borrower defaults.

Recently, there have been signs of a possible rebound, including stabilizing office vacancy rates in Los Angeles. But there are major concerns about the impending maturities of a high volume of loans originated during the boom.

Bert Ely, a bank analyst in Alexandria, Va., noted that many banks have yet to return to commercial real estate, which should give credit unions pause.

“It actually gets kind of scary if the credit unions jump in where the banks fear to go,” he said.

Back in the game

It’s unclear how many of the county’s roughly 170 credit unions offer commercial real estate loans, but only a dozen or so have sufficient size to do so in any real volume.

John Bretthauer, senior vice president of commercial lending for California Credit Union in Glendale, said the number of active lenders is much smaller than it was prior to the recession. His institution stopped making commercial real estate loans in 2009 and has no plans to resume.

“Most of the credit union industry is shrinking their assets,” Bretthauer said.

To officers of Lockheed, though, the timing feels right.

The Burbank credit union has not offered commercial real estate loans since 2006, around the time the overheated market reached its peak.

In the subsequent crash, Lockheed, like many lenders, sustained losses on loans made to commercial real estate borrowers. The institution, which has $2.9 billion in assets, has foreclosed on five commercial properties over the past two years. It had $40 million set aside at the end of last quarter to cover all loan losses.

Many credit unions that offered commercial real estate loans stopped during the recession, either to tend to losses in their portfolio or because a decline in overall lending meant their assets were shrinking, which pushed them up against a regulatory cap on commercial lending. According to federal guidelines, credit unions’ commercial loans cannot exceed 12.25 percent of total assets.

Kinecta, which has $3.5 billion in assets, cited the cap as a major factor why it stopped commercial real estate lending. But with the economy seemingly on an upswing, Lockheed officers said creditworthy borrowers are becoming more abundant.

“In order to give a full breadth to our membership, we wanted to also offer commercial real estate products,” said Oliver Kim, vice president of commercial real estate and loan services for the credit union. During the downturn, “we’ve mainly been concentrating on consumer products – basically mortgage, Visa cards and auto loans.”

The institution will offer both standard commercial real estate loans and loans backed by the U.S. Small Business Administration, which can be used for commercial property purchases.

Kim said Lockheed is taking precautions, though. For instance, the institution will only make commercial real estate loans up to $2 million, down significantly from the prerecession boom times when the loans sometimes topped $10 million. What’s more, it will no longer offer loans outside Southern California, as it had years ago.

“This time around we’re doing it only in our backyard (and) we’re going to be at a much slower pace than before,” he said. “With any product you offer, you have to have proper underwriting guidelines.”

Kinecta, too, tightened its underwriting when it resumed commercial real estate lending last summer. Paul Cleary, the credit union’s vice president of business lending, said the institution did not have significant problems with the loans during the recession but decided to play it safe nevertheless.

Since returning to the market, Cleary said he has noticed a clear desire in the market for such loans that is not being met by traditional commercial property lenders.

“Credit unions over the last couple months are coming out in the market and looking for deals, and the deals are out there,” he said.

Comprehensive data on commercial real estate lending by credit unions are hard to come by, but analyst Penrod noted that commercial loans – an umbrella category that includes commercial real estate – held steady at $2.1 billion among all county credit unions during the first three quarters of last year. During that same stretch, equivalent loans at local banks fell 6 percent, according to data from the Federal Deposit Insurance Corp.

Despite the stabilization of the market, regulators have discouraged many community banks, which tend to have higher commercial property loan concentrations, from making many new commercial real estate loans, according to experts familiar with banks’ interactions with regulators.

“A lot of banks, particularly out here in the Western states, have a lot of exposure to commercial real estate,” said Aaron Deer, a bank analyst with New York’s Sandler O’Neill & Partners LP. “The regulators are being more attentive to those ratios.”

Indeed, brokers say it is still difficult to obtain bank financing despite signs that the local market is stabilizing. The county office market vacancy rate held steady at 17 percent over the last half of last year, stopping a slide and giving observers hope that the market has reached bottom.

“Right now, for Lockheed to come into this market at this time, I think it’s a very smart strategic plan because they’re able to get into a market where there is a demand for borrowing,” said commercial real estate broker Linda Lee, senior managing director at the Glendale office of Charles Dunn Co.

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