Transwestern's Steve Pumper

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

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

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

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

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

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

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

"But that bottom will come probably in the third quarter or early fourth quarter. In the second half of the year we will establish some sort of bottom. And I say that because by the time we're through the second quarter you start getting into the summer slowdown.

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

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