PLACE YOUR BETS ON THE CMBS MARKET

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Transactions have slowed, and CMBS is taking aparticularly hard hit. Despite this, a majority of our pollrespondents (69%) believe CMBS is merely sleeping and will wake oneday. Far fewer (19%) believe CMBS is dead, and even fewer than that(12%) say CMBS is dying. Jon Mikula, senior managing director ofHolliday Fenoglio Fowler, LP, is in the majority. Here are histhoughts:

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"Nothing's going on. So far this year, there have been aboutfour pools that have been out for securitization, and they totalabout $5 to 6 billion. To our knowledge, none of the loans in thosepools were originated in 2008, they were all 2007 transactions. Toput it all in perspective, in 2007, there were about $230 billionin loans that were securitized or originated.

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"There's been almost no activity relative to CMBS lendersclosing transactions in 2008, and, as such, you've seen significantlayoffs from all the major investment banks. It's really just beenanemic. It's a function of all that's happened since last summer.If borrowers were willing to accept the economics of a CMBS dealthat could be closed today, we wouldn't have problems, it's justthat the loans they can actually close are extremely conservativeboth from a loan to value and from a debt service coverageconstraint basis, and the pricing of that capital is off thecharts.

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"When you have alternatives in the market, such as insurancecompanies and banks, and your other option is CMBS and the proceedsare low and the cost is high, well you're not going to go with thatoption. That's the reason why nobody's doing CMBS transactions.There's also the fact that there's a loss of confidence in theconsumers' eyes. They're afraid that the CMBS deals that were onthe table aren't going to close on the terms that the borrowersigned up for. There's been a lot of turmoil and a lot of retrades,there were lenders walking away from commitments, so there's amajor loss of confidence.

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"It's going to take time for the CMBS market to get back ontrack. Just a point of reference: the commercial real estate debtmarket totals about $3 trillion, and a quarter of that issecuritized loans, so it's a huge component of the universe of debtfinance. What's it going to take to turn it around? It's going totake some stability in the secondary markets. The market needs somepositive successful transactions, and when I say transactions, Imean CMBS transactions. There are a few people out there trying totake a lead on that, getting out there and making and closing thoseloans. We need that to take place, we need some leadership andmomentum, and then I think others will follow. Of course, it'sgoing to be a whole different world of underwriting and all that,but if that happens, CMBS will be back.

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"The other thing too that will help is the limitations of theother options. Because CMBS is such a huge player in debtfinancing, everybody's trying to fill the void. It's not like theinsurance companies have an open checkbook and they can just lendout whatever they want. They're hitting allocations and many are onthe sidelines not lending at all because they're concerned aboutallocation issues or they're buying CMBS paper. We're seeing thebanks pull back as their outlays are exceeding their deposits.Again, it's not an open checkbook, you can't just lend as much aspossible. I think come the third and fourth quarters of this year,you're going to see insurance companies pull back and the CMBSterms that weren't very competitive will become a competitivealternative. It's conservative and priced expensively, but comethird quarter, if the insurance companies are out of the market andthe banks have pulled back, maybe a CMBS execution makes sense.

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"The other thing that needs to happen is sellers need to berealistic about what the market is today, and that the property isworth less this year than it was last year because the buyers can'tfinancially engineer a return that they're expecting. When thatbid-ask gap in the sale market narrows and sellers realize thatlast year's ancient history and if they want to sell, they have tocome to grips with what the property's worth. When that gapnarrows, more transactions are going to take place, and that'sgoing to fuel a need for capital and I think CMBS will come backinto play. It'll probably happen in late 2008."

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