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NEW YORK CITY-Preferred equity, mezzanine and private sector funds are all stepping into the breach created by the dramatic slowdown in the CMBS market. Still, though, a robust CMBS pipeline is sorely missed by the market’s participants. It will come back, it is widely believed, when the current glut of paper that the investment banks cannot – or are not willing to – move right now finally works its way through the markets. When that will happen, and what will prompt that event, has become the industry’s favorite guessing game.

Bill Huges, SVP and managing director of Marcus & Millichap Capital Corp., tells GlobeSt.com that he doesn’t think the CMBS markets will be out as long as some in the industry believe it will. “I think it will come back quicker than a year – which is what some are saying – and it will come back with a vengeance.”

Jerry Pietroforte, a managing director with Alvarez & Marsal Real Estate Advisory Services, also belongs to the sooner-rather-than later school of thought. “I think we will see the capital markets start to turn around within two to three months,” he tells GlobeSt.com. Unlike Hughes, though, he believes its recovery will start gradually and ramp up to previous volumes slowly. “In Q2 and Q3 we will see signs of a capital markets comeback.” However, this will happen only if the economy doesn’t fall into a prolonged recession, Pietroforte says.

By constrast, Dennis Yeskey, Deloitte Consulting’s national director of real estate capital markets tells GlobeSt.com that first some non-financial issues have to be resolved. Specifically, “the rating agencies will have to correct some of their underwriting.”

Colin Whittier, VP of KeyBank Real Estate Capital, tells GlobeSt.com that once the current source of replacement capital has run out, the CMBS market will come back to life. Once life insurance companies books are filled for 2008 – and given the demand they are likely to fill sooner than usual – participants will turn to the CMBS markets. “It’s not as if you can’t get financing in the CMBS market for good deals – it is just more expensive now than other sources.”

Spreads for multifamily loans, for instance, are 100 basis points more than what the agencies are offering now, he says. A standard 10-year deal with a GSE is about 180-190 basis points more than Treasury right now. A conduit quote for that same deal would be 280-300 basis points more than Treasury.

“When the life insurance companies have lent all they will lend – which will probably happen by mid-year, people will have to go back to CMBS no matter what,” Whittier says. “And as you see more trading, the spreads will come down,” he says.

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