Joe Dykstra, executive vice president of Los Angeles-based Westwood Financial Corp., has about $60 million worth of financing before conduits at the moment. For the most part, these properties are not, as he puts it, "life insurance quality." Yet he is fairly certain he will get most, if not all, of the funding.

Over the next five years, the company will have about $600 million in secured debt coming due that will require refinancing. Whether the CMBS market will absorb that, however, Dykstra doesn't have a clue.

Since the crash, the CMBS market has proven itself willing to turn off the spigot with little notice. That happened in Q3 of 2011 as Europe's sovereign debt problems became apparent and Standard & Poor's downgraded the US debt rating.

Then, conduits became active again in the middle of December. "Toward the end of the year, you could pick up the phone and get aggressive quotes from a number of players." Dykstra says. "Today, there seems to be more debt available than there was in the last five months of the year. But I have no doubt that as soon as there is any risk exposure to the paper, they will exit.

"We are shopping around now because the CMBS shops are open—they might not be in six months," he adds.

How the capital markets will perform in 2012 remains a giant question mark for the commercial real estate industry. There are, of course, certain assumptions one can make. The CMBS market is not likely to considerably outperform 2011 in originations. Regulators will not significantly relax pressure on banks' real estate lending operations. Underwriting standards, in general, will likely remain high and projects that do not qualify for best-in-class financing will pay higher—in some cases substantially higher—rates.

Indeed, one very real worry is whether the markets will be able to turn over the $360 billion of debt that is maturing this year—a category that includes CMBS, bank debt and life insurance loans.

The answer is impossible to gauge, says Dan Gorczycki, the New York City-based managing director of Savills, who points out that the commercial real estate market's financing needs for 2012 are, in fact, probably much higher than $360 billion. There are other line items that need to be incorporated into the total—acquisition financing, for example. On the other side of the ledger, early repayments can be subtracted.

However, no matter how conservative one is with the first estimate and how generous with the second, the total can realistically be expected to be in the neighborhood of well over $500 billion, he says.

The picture is equally as dismal at the micro level.

"As a general matter, 2012 will not be a great year for commercial real estate borrowers looking to finance purchases, development or refinancing, and it all comes down to diminished property values, particularly outside of top-tier markets like New York," says Dennis Russo, who oversees the transactional commercial real estate practice at the New York City-based law firm Herrick, Feinstein. "If a borrower is looking to do a refi, the lender will look at the property and see a diminished valuation and offer a loan that probably won't be enough to take out the original lender or loan facility. For a new project, the loan-to-value will probably still be less than what borrowers could use."

In addition, he continues, the need for more equity—particularly preferred equity—changes the return equation for the borrower, as does relatively expensive mezzanine debt, if that is a piece of the financing puzzle. "Ratios on multifamily properties will run toward the higher end of the LTV number line—maybe 70% or so—but office won't. It's probably going to be more like 60% to 65%."

So given the trends in the real estate capital markets, lenders won't be able to meet all of the demand this year. In fact, the top lenders will only meet a tiny portion of demand. A great number of deals that come to market will likely have done so via some combination of high-octane and highcost financing, provided by special lenders or equity and mezzanine players.

This will be yet another year of 'haves' and have nots' in the real estate community— only the distinction will be even more stark, Gorczycki says, especially if the conduits shut down again. "A minority of companies would get funding from a life insurer or a bank like Wells Fargo at a 5% to 5.5% interest rate. Others will have to deal with the specialty lenders, which now want Libor plus 650, or equity and mezzanine players, with an interest rate in the mid-teens. Maybe a bank could provide 5% money, but it will be with recourse."

Borrowers will find the greatest shortfall in the 5% to 6% money range even with the CMBS market in active mode, says Jimmy Board, Houston-based senior vice president with Jones Lang LaSalle's Capital Markets team. "There's a 150-basis-point delta of missing money that used to solidify the secondary markets," he says.

It's those secondary markets—that is, any market outside of the traditional gateway cities of New York, Boston, Chicago, San Francisco, Los Angeles and Washington, DC—where a shortage of funding will be most apparent. That trend had started to reverse at the beginning of 2011, with lenders becoming more open to second-tier markets. The sovereign debt issue, though, has had a chilling effect. Right now, Dykstra says conduits are lending in these markets, but he's hardly counting on them being there at any given point through the year.

In 2011, for example, he didn't tap any of the conduits, because he couldn't. "We relied strictly on life insurance money and our own cash." If he has to, he will do that again, he says.

Other companies less well situated will have to turn to more expensive specialty lenders—a galling prospect for some companies. "In the old days, everyone could find a reasonably priced package," Gorczycki says. "It might have been Libor plus 350 from iStar or Corus, but it was available. You really had to be a problem child to go to the hard-money lenders."

Granted, Libor plus 6% is not the end of the world, Gorczycki adds. "But it's not a fixed 5%, either. You can't call yourself a have' if you have to sign your balance sheet on the line." Some of the players in this 6% plus space, Gorczycki says, include Prime Finance, Guggenheim Partners and Ladder Capital.

To state the obvious, the hairier the project or borrower, the more expensive the financing will be. Lenders like Emerald Creek Capital, to give one name, could charge 10% or more on loans. "You can also include institutional equity and mezzanine in this category, with their interest rates in the low to mid-teens," Gorczycki says.

The good news is that lenders in the Guggenheim Partners et al. category are more numerous than ever before. "Most of these funds were raised in 2008, 2009 and 2010," Gorczycki says. "They thought they would do life insurance-quality deals when it looked like the world was ending. That didn't happen and now they have reassessed their business models and are lending on assets one tier below."

Still, JLL's Board cautions, if the third quarter is any guide, not all deals will get done in 2012 if global or domestic events go even slightly haywire. After spreads widened in Q3 2011 and conduits entered their pause stage, half of the deals Board was working on were pulled off the market.

"There were some alternatives—debt funds that skinned up pricing or mezz that could be layered over life for first mortgage debt—but in general there were not a lot of options for many borrowers," he says.

Sometimes it worked out, though, he adds. Board tells of one deal he pushed to closure in Q3 for $50 million. It was an office transaction and the borrower had life company debt at 60% LTV at a 4.25% rate. To fill the gap, the borrower used mezz to raise the LTV to 76% at an 8.25% rate. "So the blended cost of capital was inside of 5%.

"We did similar structures with CMBS—using mezz to layer on top." Here Board tells of a $240-million refinancing on a Chicago asset last year that was able to raise $220 million in the conduit market before it shut down. Then the borrower layered another $20 million in mezz money on top.

Board expects—or rather hopes—to structure similar transactions this year as well.

While the middle ground is a mix of lenders charging varying rates, the top-tier lenders are clearly defined. For instance, there's Wells Fargo, which "is so aggressive with its commercial real estate lending now, it belongs in its own separate category," says Matt Galligan, executive vice president and group head of CIT Real Estate Finance in New York City.

Other large providers of real estate finance include Bank of China, although it likes to partner with indigenous financial firms, such as Bank of America and JP Morgan Chase, Galligan says.

Large, however, does not necessarily mean active. "These banks are protective of their top customers but they are not interested in expanding their real estate loan portfolios beyond their current franchise," Galligan says.

"The next tier contains the mid-level banks that are willing to lend between $20 million and $50 million." Galligan points to Capital One, M&T, Sovereign, PNC and TD Bank, which does have portfolio issues but is still quoting on deals. CBIC, Galligan adds, is willing to do larger deals as well.

All in all, "the large loan market, which I would define as in excess of $50 million, is incredibly thin," Galligan concludes. By contrast, he says, it is a good time to be a small or midsized borrower with a good story to tell. He defines small loans as funding in the $5-to $15-million range, Galligan says. "Many banks that lend to small businesses are liquid and if they don't have large real estate exposures, they are in the market."

That is a big "if," however. There's a significant number of commercial banks with heavy exposures to real estate loans, which have become anathema to regulators. "Regulators look at the true value of properties—which is down, particularly outside the top-tier markets—and they've become extremely tough on collateral," says Herrick, Feinstein's Russo. "So you can have a performing loan and a great guarantor who never missed a payment, but the property, by loan-to-value standards, is worth less than it was before."

"It's fair to say that life companies are the cheapest form of financing for properties that are rented with cash flow," says Jimmy Kuhn, president of Newmark Knight Frank in New York City. However, they're not the fastest. For that, one goes to the conduits, which offer up to 75% LTVs to boot.

Kuhn helped broker the sale of the old New York Times Co. building at 229 W. 43rd St. "It sold to Blackstone for $160 million, all cash," he says. "A letter of intent was signed within 48 hours and the contract was completed with hard money within a week."

Deals like that illustrate how essential conduits are to the commercial real estate market, despite its mercurial tendencies. Westwood's Dykstra has been an active borrower for years with the conduits and while he can get along without them, he doesn't really want to.

Before the crash, he worked with Bear, Stearns. Two years after the crash, in November 2010, Westwood was among the first to borrow under Cantor Fitzgerald's newly thawed conduit program for a property it was acquiring in Atlanta. Now he's working with Cantor Fitzgerald and a few other conduits that are doing business. He ticks off what is on January's agenda: a refinancing for a loan on a Scottsdale property for $28 million, an acquisition in Austin, TX and another refinance in Macon, GA. "They're talking about executing an application and closing within a month," reveals Dykstra. "We're only asking for 30% to 35% LTV, though. The rest we will cover with cash."

Whether the CMBS markets will continue to close deals depends in large part on the B-piece buyers—those risk-taking investors without which the CMBS market cannot sustain itself for any length of time. Industry watchers have been dismayed at how few have returned to the market since the crash.

Torchlight Investors in New York City was one active participant last year, but managing director Steven Schwartz's assessment of 2012 is hardly comforting. "We plan on being active in the CMBS market; we still like it very much," he says. He's not willing to guess what the company will do in 2012, though. "The challenge in predicting a level is that the market changes very quickly, as we saw in the third quarter. Spreads gapped out and there wasn't a lot of lending."

Torchlight did four B-piece buys in 2011, and the most Schwartz will allow for 2012 is that the company hopes to do the same this year. "But if underwriting standards disappear and/or we don't like how originators are originating, or we don't like the deals that are being offered, then all bets are off."