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LOS ANGELES—The other shoe has yet to fall, but Dean Pappas, a partner with Goodwin Procter’s real estate practice in Los Angeles, thinks it could drop soon.

“I don’t think that this crisis has even hit the commercial market yet,” he says. “When you consider all the securitized debt floating around out there on the commercial side, and the typical two- to four-year terms, all this debt that has put on the books in ‘03, ‘04, ’05, ‘06 and ‘07 hasn’t rolled yet. All that debt is going to be coming due, and that debt went pretty deep into the capital stack on very inflated pricing.”

He adds, “The Fed is focused on the residential side, but they aren’t saying anything about commercial. There’s some potentially scary stuff out there with the commercial mortgage debt.”

One worry: “Cap rates are going up,” Pappas says. Pappas notes that people need to come to realistic terms on the pricing of property. “Everybody is saying this is a liquidity crisis,” he says. “This isn’t a liquidity issue it’s a pricing issue.”

Banks are looking at assets and pricing them going forward, and looking at financing those assets at more traditional underwriting standards.

“I’ve got some large institutional clients out there right now, and the mortgage loans are coming in at 50% to 60% LTV,” he notes. “I think the issue we’re facing in the economy is a pricing issue, everything has to deflate. Pricing just has to come down, you can throw as much liquidity at this as you want.”

The time of loose underwriting, and low interested rates are gone, he adds. “The days of 4% interest rates are gone, or they should be gone,” he says.

This banking and lending fallout is striking the heart of the Southland’s economy: the twin ports of Los Angeles and Long Beach. Container traffic is expected to continue to fall due to an anticipated drop in exports now that the nation’s major trading partners are feeling the economic impact of the lending fallout.

The retail fallout is obvious, with many big names hitting the skids, while the office market is suffering, particularly in Orange County, which was so heavily dependent on real estate employment in the mortgage arena, and the Inland Empire, where the housing fallout has perhaps been the worst.

What about the $700 Federal bailout, won’t that boot the Southland’s economy? Pappas says: “I don’t think it will be enough.”

Bob Safai, president of Madison Partners in Los Angeles, agrees with Pappas on the bailout.

“I think it’s a Band Aid on a cancerous situation,” Safai says. “There’s so much that needs to get worked out. You have to let free markets fall to where they’re going to fall.”He adds, “I think the bailout is going to be a lot more than the $700 billion that’s being thrown out there.”

Safai sees first hand the squeeze being put on commercial real estate. In real estate, he says, “people are catatonic with fear. People cannot go out there and finance deals. It’s kind of a fluid situation, it’s changing daily. Valuations are changing daily.”

But he notes that real estate, long-term, is a “seven-year, 10-year, 12-year hold.”And that means it’s back to fundamentals. “It’s a really an interesting opportunity to buy things at depressed prices,” he says.

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