"An economic slowdown will make everyone more conservative - which means less capital to real estate," says Joe Franzetti, director in the commercial mortgage finance group of New York-based Salomon Smith Barney.
"To the extent the slowdown manifests itself in delinquencies and defaults, I would expect that many lenders would head for the hills," says Franzetti
."Capital will get more scarce and expensive, and borrowers will get squeezed with less cashflow and higher borrowing costs - which probably means lower values and more credit concerns.So in the short run a slowdown will result in people realizing that trees do not grow to the sky, and the brakes will get slammed on lending programs."
If a slowdown occurs, and lenders and bondholders are not decimated as happened in the last recession, this could be a positive development, adds Franzetti
says another key CMBS development is the tendency for there to be multiple players in each deal, because no lender can generate enough product on its own."Single-property or fusion deals will become more prevalent as REITs will find the mortgage market a safer haven than unsecured debt," he
says."Deal size is more likely to remain the same, if not smaller."
Since there is an administrative burden to multiple-handed transactions, there is a natural tension about the number of loans, loan size and multiple players, he
says.Due to these factors, the market can expect more scrutiny from servicers as the market looks to its inevitable downturn.
Overall, industry observers are predicting, just as they did in early 2000, that demand will increase in 2001 for more floating-rate deals, where opportunities will be available in higher-risk turnaround properties.
says that CMBS deals will continue to all look alike as investors prefer transactions that are similar to other deals in the market."As a result, conduit lenders are going to look inwardly to revamp their operations to maximize efficiencies and profits," he
Last November, for example, Bank of America
, decided to close more than 10 of its regional conduit operations in secondary markets to focus on its primary markets.
"Therefore, the focus will be on process and not products," says Franzetti
echoes what so many other industry insiders have observed the past few years - profit margins have compressed for lenders and are not likely to widen.
The result is that the lack of profit and the reduced margin for error in lending has taken all the creativity out of the market," says Franzetti
.Lenders cannot afford to be different or imaginative when they are not being paid relative to the risk."As a result, conduit lenders will be more inclined to focus on the four major food groups of property types, which will be conservatively underwritten," he