WHO'LL FILL THE CMBS GAP?

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If you can't see opportunity in crisis, chances are youdon't work for a private equity shop. Or an insurance firm. Or evena local bank. The 131 respondents to last week's Quick Poll aboutfilling the CMBS gap say those three entities are there and readyto take up the slack. For the record, the votes came in at 42%, 32%and 26% respectively. Steven E. Pumper, executive managing directorof investment services for Transwestern, (and co-moderator--witheditorial director Michael Desiato) of Real Estate Forum's annualExecutiveForum, says that this meltdown is not only deep but long, andthere's plenty of caution to go around. Here's how he seesit:

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"The poll results don't surprise me. For many of the banks therehave been some mandated pullbacks by the credit committees and thatpace has picked up over the past few weeks.

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Everyone is trying to get their arms around what the totalwrite-downs from this subprime lending meltdown could be. At theend of last year, I thought the number was $260 billion. Now thatnumber is looking more like $350 billion plus. And they've circledfrom $135 billion to $150 billion of that--only about 40% of theproblem. That leaves a big amount out there to be dealt with.

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"The money centers, regional banks and insurance companies canall step up and take some of that market share. But they too haveto be more conservative in their underwriting standards. They'vegotten a lot stricter, and the tightening structure is moreimportant to lenders than pricing alone.

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"Within the banking sector there's been a focus on profitabilityversus growth, and over the past five or six years, it's all beenabout getting the money out the door. A rising market lifts allboats, and everybody's been real successful--up until last summer.Now there's stress on numerous lenders, and the concern is if itwill spread into difficulties with auto loans, credit cards andstudent loans. Those are potential targets for additionalwrite-downs.

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"There's a perception among lenders as well as people on theequity side that there may be opportunities farther down the road.Banks and insurance companies are being bombarded withopportunities to place debt, but they're being more selective.

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"I'm hopeful that, in the second half, foreign investors willtake a more aggressive role, and they've been fairly active todate. I see Middle Eastern and Asian money waiting to see a bottomestablished so they can come in in a fairly significant way.

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"But that bottom will come probably in the third quarter orearly fourth quarter. In the second half of the year we willestablish some sort of bottom. And I say that because by the timewe're through the second quarter you start getting into the summerslowdown.

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"Now, we haven't experienced that so much recently because thedeal flow has been so great. But this year will be different;there'll be plenty of deals to look at but there'll be additionalscrutiny and underwriting standards. They're not underwriting rentbumps of 6% or 8%. They're going back to CPI, and we're looking atmore normal 2% to 3% bumps. That pushes a lot of things into thethird quarter.

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"Then we'll start to see some sort of uptick, and what willprobably signal that is an event. As soon as someone viewed as asavvy investor makes a significant acquisition play, people on thesidelines will step back in."

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John Salustri

John Salustri has covered the commercial real estate industry for nearly 25 years. He was the founding editor of GlobeSt.com, and is a four-time recipient of the Excellence in Journalism award from the National Association of Real Estate Editors.