In September, German bank Eurohypo and developer Forest City Enterprises Inc were negotiating a $65 million loan for 9 MetroTech, part of a 11-building office campus in Brooklyn, New York.

By October, the European bank told Forest City to find another lender, according to sources familiar with the talks. A month later, Eurohypo announced it was halting lending for U.S. commercial real estate altogether.

Eurohypo is not alone. Many European banks are retreating from the United States property market to deal with problems at home.

With other lenders also pulling back from the market, borrowing costs for property developers and buyers could jump, said Michael Higgins, managing director and head of U.S. real estate finance for CIBC World Markets Inc.

The end result could be higher construction costs and lower property values, putting a drag on the U.S. commercial property sector's recovery.

European bank lending to the U.S. property market has been declining since the financial crisis, but the retreat is showing signs of intensifying now.

In recent weeks, Commerzbank AG said it planned to make new property loans mainly in Germany and Poland now, while Royal Bank of Scotland said it would reduce property lending globally.

Over the last two years, total European bank loans to the U.S. commercial real estate sector have fallen by $9.5 billion, or 30.9 percent, according to real estate research firm Trepp LLC.

European banks, saddled with exposure to sovereign debt from faltering countries like Greece, are under orders from regulators to come up with more cash to cushion the blow from possible losses. The response for many banks has been to pull back on risk.

For the U.S. commercial property market, Europeans are relatively small lenders, but they were important in the biggest U.S. cities, including New York, Washington, San Francisco, Boston and Los Angeles. A retreat by those banks could hit those markets hardest.

U.S. community banks, regional banks, and commercial mortgage bond investors have also been reducing their lending in this area.

All this is happening when the U.S. market needs all the help it can get: Over the next five years, some $1.734 trillion of commercial real estate loans are scheduled to mature, according to Trepp.

A CRUCIAL SOURCE OF FUNDING

Loans are crucial for U.S. commercial real estate transactions. During the boom of 2004 to 2007, some investors borrowed north of 90 percent of the purchase price. Today, lenders are willing to loan only about 60 percent of the value of the property, and that's to well-qualified borrowers with a good track record.

If you look broadly at the market's demand for financing for new deals and maturing loans, having a rich, deep pool of lenders in the market is important, said Sam Chandan, president and global chief economist at commercial real estate economics firm Chandan Economics. We're not positioned to see any significant group of lenders step away from the market.

But European banks are doing just that.

In the two years ended September 30, German banks -- the largest European lenders to the U.S. commercial real estate sector -- cut those loans by 27 percent to $15.8 billion, according to Trepp. The firm bases its figures on those collected by the U.S. Federal Reserve, which records only foreign banks with branches in the United States.

British banks, which had been the No. 2 source of European lending, started reducing their U.S. exposure by more than 70 percent to $1.3 billion since they began cutting back in the second quarter of 2009. At the same time, French banks are down by a third to $1.6 billion.

It's their problems at home that are more the issue rather than they're hugely worried about U.S. exposure, Trepp Managing Director Matt Anderson said.

The European Banking Authority has pressed banks to raise about 106 billion euros ($137.99 billion) of capital, in part because of their sovereign debt exposure. The new requirements to hold more liquid reserves against certain loans means more discerning and less lending.

As European banks have retreated, Asian banks have stepped up their lending to U.S. commercial real estate. By the end of the third quarter of 2011, Chinese banks were the second-largest source of foreign bank loans to the sector, according to Trepp.

But overall loan levels from Asia are still low.

Chinese banks have increased their loans outstanding to the U.S. commercial real estate sector by 261.6 percent to $3.1 billion in the two years ended on September 30. Taiwanese banks have increased their U.S. commercial real estate lending by 6.7 percent to $2.4 billion.

Those increases are not nearly enough to make up for the loss of European bank loans over the same period.

Japan also has retreated, with its balance sheet of loans for U.S. commercial real estate down 13.8 percent to $800 million.

Since the second quarter of last year, U.S. banks have been steadily decreasing their U.S. commercial real estate loans. They continued to do so in the third quarter, with another net $3.1 billion of U.S. commercial mortgages off their balance sheets, according to Chandan Economics.

(Reporting By Ilaina Jonas; Editing by Lisa Von Ahn)