I once explained to a group of Bankers that “Real Estate Guys” are like heroin addicts, and that as long as they are willing to make their money available it will find very willing recipients, until they are cut off.  Perhaps, this was not the smartest thing to say, but it is as good an explanation of the boom and bust cycle in real estate as any.  Every cycle is a little different than the last one, and this one has been characterized, nationally, by a huge excess in residential construction, and the advent of Wall Street (securitized) lenders coming into and exiting the market, mark to market accounting rules, and the displacement of traditional portfolio/relationship lenders (banks and insurance companies).  Since I have incorporated the woes of an industry tat were a long time in developing, and have yet to be resolved, all in one sentence, let’s break down a few of the concepts in a little more depth.

1)  The beginning and ending of “Wall Street” loans: Toward the end of the  last down cycle in both the property and property lending markets, many banks had no capital to lend to real estate.  Some creative financiers, particularly at places like Nomura Securities and First Boston, began to write loans against commercial properties.  These loans were then “securitized”, packaged with other loans and sold to investors in the form of CMBS (commercial mortgage backed securities).  Eventually, the issuance of these loans and bonds became so commonplace and efficient that this marketplace became the lender of choice for borrowers seeking any combination of maximum loan to value available, lowest interest rate, and complex structure.  As loans were, in effect, sold to many investors, the size of these loans could easily be quite large, certainly larger than the typical bank would typically originate and hold on its balance sheet.  with the onset of the financial crisis, origination of these loans stopped.  This happened both suddenly and in virtual totality.  The status of this marketplace is perhaps the biggest open issue in real estate finance today.  Assuming every one of these loans were “money good” (an assumption that nobody would make), the absence of this origination would still put these loans, and the buildings that go with them, in peril.  As these loans come to maturity, who will re-finance them”  Some answers to this question may come from the Treasury’s TALF program, which will provide financing for both new and legacy CMBS.  Others may come from some of the large banks which have raised tremendous amounts of new capital in the past few weeks.  The only thing uncertain about this marketplace is uncertainty.

2)  The return of portfolio lenders: Ironically, banks themselves may have been spared some of the trouble that they would have otherwise found, because CMBS originators priced them out of the marketplace.  In the New York City marketplace, banks like M&T, Signature, Capital One, TD, New York Community, and others, who maintained long term relationships with Owners and Developers with track records have, thus far, suffered relatively few losses on on their real estate lending in the area.  Though their stock prices have been very damaged by the market’s perception of total meltdown, their balance sheets are healthy.  While these banks do not have the size or inclination to write multi-hundred million dollar loans, their long term customers find their windows open to transactions in the under $100 million range.  In this marketplace, Bankers will require more equity in projects than they might have several years ago, and the spreads on their loans will be higher too, but deals that make sense can get done. Everything said about these banks can be said about many other banks in reasonably healthy areas of the country, and about the healthy life insurers too.

3)  Where do we go from here” The biggest variable is the status of our economic recovery.  If it is real, the strength of our banking system may be such that it can absorb a great deal more lending.  It may also be that the CMBS market makes some return, either with or without government assistance.  If this period of “green shoots” is a head fake, it is certain that Lenders and their regulators are not going to be eager to throw good money after bad.