During the first quarter of 2008, fear of recession and a scarcity of financing are causing a significant reduction in investment sales, perhaps the most precipitous drop in decades.

It is difficult to comprehend that during the first 90 days of the year contracts for sale were signed for only two prominent office buildings:

Murray Hill Properties’ purchase of the 39-story, 748,000-square-foot office building at 1250 Broadway for $310 million (which is scheduled to close in May) and Ben Ashkenazy’s recently purchased the 27-story, 600,000-square-foot tower at 650 Madison Ave. which closed on Tuesday. Twelve months ago, both of these buildings would have fetched at least 20% more and purchasers would have been able to secure up to 90% financing.

Last week, two of the real estate industry’s most prominent leaders went on the record with their feelings about the state of the market.

“During my entire career of more than 55 years in real estate, I have never seen a dislocation of the capital markets of this magnitude,” the president and CEO of Silverstein Properties, Larry Silverstein, said during an appearance on my television show last week.

“Based on the current climate in commercial real estate, investment sales brokers can take off for the entire year,” the chairman and CEO of Vornado Realty Trust, Steven Roth, said last week at a conference on real estate investment trusts at New York University.

“I agree with Larry Silverstein and say that it’s the worst financing market I have seen in my lifetime,” the chief real estate lender at a prominent German bank, who requested anonymity, said. “We are doing deals, but very selectively. We are doing significantly less construction loans. A 65% loan to cost is aggressive in today’s market. Pricing has doubled even for the strongest assets.”

“It is no secret that the mood in the commercial real estate finance industry overall is very dark,” the regional director of GE Real Estate, David Cohen, said. “Many lenders and investors are on the sidelines, carefully watching, but not closing any loans or making any new investments.”

Mr. Cohen added: “The reality is the market probably needed this correction. Competition and the compulsion to increase volume had stretched underwriting standards beyond what is normally considered acceptable levels of risk and as a result, margins were severely depressed. … Another issue of concern to me is that few large loans are getting done. Anything over, say, $500 million, including stabilized projects, is not easy. A construction loan over $1 billion may not done in the foreseeable future, maybe three to five years at best.”

A senior vice president and director of commercial and real estate financing at M&T Bank, Gino Martocci, said that while the credit markets “appear to be putting in a bottom and some providers of credit to commercial real estate seem to be inching back in. I believe that credit availability will remain very tight throughout 2008 and 2009. This is the result of the need for the financial services industry to rebuild capital and protect balance sheets weakened by write-downs and realized losses, as well as the embedded, but as yet unrealized, losses in consumer and commercial mortgage portfolios.”

“The CMBS market is dead, the condo market is near death, and don’t expect to try to get a 10-year, non-recourse loan from a commercial bank for the next 18 months,” the senior executive vice president for real estate financing at one of the largest banks in America, who requested anonymity, said. “We are making some condominium loans for the best locations to established, well-capitalized owners and developers who have maintained relationships with the bank. If a new borrower or intermediary calls me and wants to discuss a new borrower or transaction, the window is locked and closed.”

The president of the Troutbrook Companies, Marc Freud, said that “condominium construction financing for ‘B’ locations, if its being executed, is underwritten at a conservative 70% loan-to-cost with strong liquidity being need from the sponsor. If the sponsor is asset rich and does not have liquidity, the transaction from a banker’s perspective — on these criteria alone — just became a little more difficult to get done at credit committee.”

He added: “Balance sheet lenders are slowly having a moratorium on lending on condo deals. Valley National Bank is being very selective to the point that the president pretty much signs off on condo deals now.”

A principal at Palisades Financial, Mark Zurlini, said: “From a banker’s perspective on development financing: Why lend if you don’t have to? If have a job and I am getting paid then why make a mistake at this time?”

He added: “Before the banks make a move to lend, someone needs to be told and the factual data must reinforce that the market has hit bottom and the economy is improving. Then you will see lenders willing to lend again. Owners that are selling need to come to grips that their property is not worth what is was 12 to 24 months ago. Buyers must dig deeper into their pockets to produce more cash equity, and those refinancing the 80% to 95% loan-to-value projects back in the day should hold on and pray.”

The executive vice president of commercial real estate finance at HSBC Bank, Glenn Grimaldi, said the dislocation of capital as a result of the liquidity crisis on Wall Street “has had an effect on the sale and financing of assets. As a result, the market is moving back to the fundamentals of underwriting cash flow for the near term and the enthusiastic projections are being rung of the system.”

He added: “The broad result of so much capital on the sidelines has been a decrease in sales activity, and upward change in cap rates, and a flight from certain asset classes. Condos, for example, suffer from the above but also from the single-family mortgage crisis — it’s a double whammy. It seems that there may be more pain for the system to absorb, but for the best capitalized borrowers and the projects with the best locations and economic fundamentals, money is available and it is at attractive nominal rates.”

An executive with a major life insurance company, who requested anonymity, said the majority of commercial mortgage-backed securities buyers in the past years “were leveraged buyers, structured investment vehicles, hedge funds, and collateralized debt obligations who accounted for most of the floating rate market and more than 50% of the fixed-rate market. They are now either being unwound or are on the sidelines, leaving only the traditional buyers, like life insurance companies, who are wary of weak underwriting, the rating agencies, and where real estate values are going. Traditional buyers of debt might support a commercial mortgage-backed securities market of $50 to $70 billion, not the $200 plus billion we saw in 2006 to 2007.”

He added: “Our base case is for a 20% to 30% decline in real estate values, basically taking us back to 2004–2005 levels. Life insurance companies are seeing much less roll-off of their portfolios due to the slow sales market. In 2006 and 2007, life insurance companies saw billions of unscheduled payoffs as their borrowers sold into the hot market and the properties were refinanced with aggressive CMBS debt. Life companies are now keeping loans on their books, and refinancing maturing loans, focusing on strengthening borrower relationships. This leaves less money for new financing.”

The managing partner of Madison Realty Capital, Josh Zegen, said that as lenders become more cognizant of the health of their balance sheets, “we have seen them typically decreasing their loan size in order to reduce exposure to individual projects. The multitude of local savings banks in the New York area that are under increased regulatory pressure have led to them focusing on loans on income-producing properties rather than land and construction. This has led to softening land prices in the New York metro market.”

The chairman of Carlton Advisory Services, Howard Michaels, said the finance market “is not what it was, but there is capital available. We are still seeing plenty of capital, up to 70% of the capital structure, which can be found from German banks, balance sheet and insurance company lenders, and some investment banks.”

He said the bottom line “is that while financing is costing more, there is financing available. There is no question that borrowers today need intermediaries now more than ever because the days of calling First Boston, Lehman, etc., and getting all of your proceeds in one call are over. You better be buying your property cheaper because your cost of financing is going to be higher.”

He continued: “There is loads of mezzanine and preferred equity capital and most of these investors are looking to generate opportunistic returns, which make the point about there being financing available, albeit at a higher cost. So the days of getting 85% to 90% leverage at a 6% cost are over, but you can get up to 70% financing at a normal rate with the piece of the financing from 75% to 85% costing from low to high teens depending on the asset and coverage ratios, and other underwriting criteria.”

The managing director of Hudson Realty Capital, Spencer Garfield, said: “We are seeing and borrowing on relatively aggressive terms from Fannie Mae and Freddie Mac on stable multifamily housing. In addition, the local savings banks and thrifts are providing aggressive terms on multifamily assets as well as slightly less aggressive terms on local commercial deals such as industrial, office, and retail.”

He added that “on a national level and with regard to any assets in flux, like construction, vacancy, entitlements, and change of use, there is virtually no financing available from conventional lenders. Wall Street, commercial banks, insurance company, and CDOs are not lending money at any level that makes sense. Periodically we see bids from these lenders on ‘stable’ assets at very conservative levels, with financing at sub-65% loan-to-value, with higher spreads, and points.

“The fact that the available financing is priced high and underwriting very critical, cap rates are starting to normalize, people are paying more for occupied buildings than vacant buildings, and construction has slowed dramatically thus containing overbuilding, and land prices have leveled off. So, from that perspective, the credit crisis has been a necessary market correction to what was an ‘overcapitalized’ real estate market.

“As a result of this correction and credit crunch, many legitimate projects are not able to obtain financing and the lack of financing is jeopardizing what are actually strong fundamentals in the commercial real estate market. I believe that we are about halfway through this crisis and the next stage of it will be very painful for many and very profitable for others, as I believe we are entering a distressed market whereby the sales of assets will be orderly and more painful. Once the distressed market and the resulting pain are worked through, I believe the financing markets will come back, albeit at more conservative levels,” Mr. Garfield said.

Mr. Freud of Troutbrook said private and public mortgage capital “is now significantly curtailed for many investors and developers. Deals are happening, but closings are backed up, taking longer, cutting down on the size of the loans, and with limited takers.”

The general consensus is that it’s extraordinarily difficult to finance projects in the current environment. Before we see capital flowing freely again, we will need to see value, and cap rates return to more “normal” levels. We’ll need to see some positive economic news, restored confidence in the rating agencies, and a rebound on Wall Street and in the structured finance markets. Nevertheless, money is available for real estate projects for a select group, albeit with much more stringent terms and conditions.

Mr. Stoler, a contributing editor of The New York Sun, is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.