WASHINGTON, DC—Close to fifteen years ago, give or take, I interviewed a commercial real estate finance exec who predicted that within a few years CMBS would be the dominant form of commercial real estate finance and that bank lending would become a smaller, more discrete source of capital.

At the time this was heady, bold talk. Admittedly the shift away from relationship lending had begun a few years back, possibly due to the tightening of lending standards by commercial banks in the early 1990s, but at that point it was still difficult to imagine a complete flip flop of CRE's lending environment.

The executive, who worked for CMBS shop was rather smug as he explained why this was inevitable. The CMBS markets were more efficient and could repackage and sell off loans ad nauseam based on investor appetite. No balance sheet limitations here.

This executive would have been less smug if he could have gotten a glimpse of his own career path. About nine years later when the Great Recession hit, I was sorry to read he had been downsized. He bounced back quickly, though, industry press later informed me, securing another position relatively quickly.

The parallels between this particular finance exec's personal journal and the larger CRE lending industry are many. Lending sources and structures are, at regular intervals, either disrupted and/or enhanced by new methods. Oftentimes these changes are absorbed effortlessly and to the greater good of the sector; occasionally a curve ball throws everything and everybody off stride. When that happens, these sources and structures either grow stronger or fall back to morph into something else. It is a Darwinian process that befits the nature of all capital markets.

Darwinian, though it may be, the CRE capital markets do get a lot of love -- at least if one is defining ever-growing capital flows as love, which for the purposes of this article we are.

Over the past 15 years originations and lending have grown significantly, supporting -- or is that pushing? -- commercial property valuations, despite or perhaps because of the natural selection nature of the activity.

A Story of Growth

In 2000 CMBS in 2000 was $48 billion, according to CREFC data. The industry went on to originate $65 billion the following year.

For comparison, last year there was $89 billion in CMBS origination; year to date there has been $52 billion originated. The high water mark was in 2007 when $230 billion was originated.

Bank lending has made a similar upward trajectory, albeit on a smaller scale as Federal Reserve Bank data show (see charts 1 and 2).

Bankers As Safeguards Against Securitization Excesses

But it was not an easy slog as a quick trip down memory lane will show.

Mistakes, as someone once said in another era about another national issue, were made.

In 2000, the then chair of the Federal Reserve Bank Alan Greenspeen noted in a speech that ever since the global financial crisis in the fall of 1998 "the widespread optimism that was apparent in financial markets has given way to some reassessment of risks and opportunities."

As we came to learn, however, nothing that might have been envisioned was preparation for the financial crash of 2009.

Even Greenspan seemed sanguine about the dangers averted.

He said:

Events brought into sharper focus the possibility that liquidity in many markets can dry up simultaneously when fear spurs risk aversion, and an intense, near-term focus on protecting capital values markedly elevates the demand for liquidity. Markets largely recovered from that episode, but an imprint was left in the form of wider credit spreads and more cautious behavior on the part of banks and other lenders.

Greenspan would become famously, by turns, nonchalant about the possibility of a bubble forming and then, along with the rest of the world the middle 2000s, very concerned.

Back in 2000, though, he seemed to believe that the banking system would be able to act as a first defense against the excesses of the securitization market. He said:

History teaches us that a sound banking system, willing and able to take deposits and extend credit, is a prerequisite for the long-term health of the national economy. Securities markets alone will never be able to substitute for the extensive and detailed knowledge that bankers--especially community bankers--bring to the intermediation process.

The Brewing Fears About the GSEs

In 2000 the thrift savings bank meltdown was fresh in the mind of legislators. Where would the next problem area develop? Many believed it would be the GSEs. Hearings were called. Naturally, the then Freddie Mac CEO Leland Brendsel was among those summonded. He told Congress that it was a myth that "Freddie Mac is the next thrift crisis waiting to happen."

I will get right to the point: in 20007 Brendsel settled with the Office of Federal Housing Enterprise Oversight, which had been seeking $1 billion in penalties for alleged participation in accounting manipulating at the GSE.

As I said, mistakes were made.

Still, here we are. Over the past fifteen years financials innovations have been developed, some of which have been discarded, some adopted with gusto and some never should have left the starting gate. The industry has forged on and is currently confronting yet another round of issues. As it does, it is buttressed in large part by the capital markets never-ending capacity to evolve.