Funds are still extremely tight, and the money that is available is looking for quality, says Steve Fried, a vice president of Mesa West Capital, Los Angeles. The result is an odd situation in which spreads are tightening, from 13% to 15%, to 11% to 13%, despite a dearth of deals.

"It's weird that spreads are coming in when there are still so few deals, but everyone is fighting over the quality deals," said Fried, whose firm is a portfolio lender specializing in short-term (three-year), nonrecourse, interest only loans of $10 million and more.

"As there's been less risk perceived in the marketplace, spreads have come in, though I'm not sure how much that's impacted the marketplace," says Susan Pickrell, senior investment officer of John Hancock, Walnut Creek, CA. "Underwriting standards won't change until there's more competition in the marketplace. There's no reason to."

The situation is a dramatic shift in just a two-year period. CMBS issuances totaled about $270 billion in 2007. This year, just $0.6 billion will be issued, a figure that is optimistic, said Timothy D. Wright, a senior managing director of Holliday Fenoglio Fowler, San Diego. Deal volumes, at $438 billion two years ago, will be $14 billion, Wright noted. And pension fund investments, at $71 billion in 2007, will come to $29 billion this year.

"It was a good time [in 2007]," Wright said. "Then we caught an edge and had a bit of a wipeout."

That doesn't necessarily make it easy for developers looking to finance new projects or even refinance stabilized assets. Developer TRF Pacific, for example, was refinancing a successful, Target-anchored 450,000-square-foot center. Target owned its store, TRF the rest of the center.

"This was our first refinance since everything came apart," recalled Douglas Exworthy, company manager of Seattle-based TRF Pacific. "We went to 25 different lenders [all life insurance companies]. We got one written term sheet, from Susan. Three others gave quotes, but they were 50 basis points to 100 basis points higher than Hancock's."

The problem: the loan was $44 million. Exworthy did the deal with Hancock.

But the logjam could be breaking.

"We're seeing a lot of peculiar-type deals come in," including investors paying cash to buy the shopping center portfolio of a troubled bank, said Karine Clark-Foreman, vice president of commercial real estate at US Bank Newport Beach, CA. "Competition is coming in and starting to set us straight in the flight to quality. We want loans. We need loans."

The industry has realized that it overreacted on property values, with appraisers literally decimating the values of some projects.

"We were crazy with fear, so we'd downgrade everything," Clark-Foreman recalled.

But with the industry more stable, and US Bank's TARP Funds repaid, a number of these properties are being upgraded. This provides a prime opportunity.

Pickrell noted that Hancock's loans, historically around $12 million, are $25 million this year.

"Now is the best time to be lending if you're going into a deal," Clark-Foreman said. "There's nowhere to go but up."

Instant Insights /

Deals Are Hard, But Not Impossible

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