There is perceived “mayhem” in the real estate capital markets.

Many view the current credit market for financing of commercial real estate as akin to the turbulent days of 1991. In the early 1990s, access to mortgage funding suddenly dried up, creating one of the greatest risks to leverage investors: the inability to refinance their maturing mortgages.

Today, certain real estate investment bankers have become more conservative and, in rare instances, have temporarily suspended financing for new projects. Other lenders are repricing the terms and conditions of financing, requiring stringent underwriting standards. Investors are concerned about whether real estate lenders will offer competitive financing to allow them to pay the high prices asked by sellers. The turbulence in the credit market is causing certain lenders to stay on the sidelines with a wait-and-see attitude.

Real estate analysts say that while the credit situation is dire, there are important differences between today’s climate and that of the early 1990s.

The president of the City Investment Fund, Thomas Lydon, said that in 1991 the largest commercial banks and insurance companies lending to the real estate industry were in a crisis mode. “The entire savings & loan business was in dissolution. In 2007, the issue is getting paid for risk, not the lack of liquidity,” Mr. Lydon said.

He said the current crisis is a readjustment toward a better reflection of the true underlying risks in the real estate marketplace. “It has been obvious for some time that the borrower of mortgage debt in the real estate sector was the beneficiary of loose underwriting, a system rewarding large volumes of lending and the willingness of investors to accept spreads on complex securities far below any historical precedents,” he said.

“There is a tremendous amount of untapped equity commitments in funds that can support the repricing of deals, and avoid lenders being paid more. Some fringe deals might take losses, and a few highly leveraged developers might have to sell off properties, but the stronger owners and developers will adjust and prosper,” Mr. Lydon said.

“Will the fixed-income area suffer the same issues in the high-yield private equity deals? When investors start to worry about the future, equity investors delay decisions, and then deal volume is down and a downward cycle begins,” he said.

Still, Mr. Lydon said the strong overall economy in New York will overcome the challenges: “The ‘mayhem’ will pass with all players in the sector being better equipped to deal with risk.”

The executive vice president and principal at Cushman Wakefield Sonnenblick Goldman, Mark Gordon, said the difference between now and 1991 “is that the economy is strong and the real estate fundamentals are great. In most major markets there is limited new supply, asset values continue to increase and rising land and construction costs will prevent that from changing in a material fashion.”

He added: “The debt market has become ideal from a borrower perspective and it was just a matter of time until we were in for some adjustment. What is going on now is that many lenders are reevaluating their loan portfolios and reassessing perceived risk. While it will take some time for the current backlog in the collateralized mortgage-backed securitized loans to sell, I do believe that the strong industry fundamentals will result in the market returning to normalcy in the short term.”

The principal at Antares Real Estate, Joseph Beninati, said real estate newcomers are panicking more than the old guard. “What I find most amusing is the herd mentality of individuals in the real estate community. Recently I had a real estate private equity firm executive liken this credit market to 1991, and say, ‘We have seen this movie before.’ I can respect that point when it comes from the mouths of true veterans, except this came from a 33-year-old principal who was 17 years of age in 1991, just old enough to watch his first R-rated movie.
“The point is that it is now stylish to liken these markets to previous markets, but dangerous, as it overlooks new fundamentals that are not better or worse than the past — simply new — as for credit,” Mr. Beninati said.

“There is no crisis, no mayhem in the commercial real estate capital debt markets,” the president of Allied Partners, Eric Hadar, said. “Risk has been mispriced for almost a decade, and the lack of intelligent underwriting is now surfacing. Up until now, the great fool theory has prevailed and there was always a refinancing or a sale available.”

Securitization of commercial mortgages has helped provide financing for real estate. Securitization provided financing and lowered the risk of access to funding and the cost of financing. According to a report by Bernstein Wealth Management Research Report on the state of commercial real estate: “Fifteen years ago, less than 2% of the commercial mortgages were held in commercial mortgage backed securities form; today more than 26% are as well. Wall Street has continued with the morphing of commercial mortgage backed securities (CMBS) structures into collateralized debt obligations (CDOs). The CDO market, which provides an outlet for higher risk tranches of CMBS mortgage pools, increased in size in 2006 by more than 60% over the record volume in 2005, to reach nearly $35 billion. The volume and velocity of debt market activity may raise concerns that the ample liquidity could be sowing the seeds of future problems.”

The co-founder and principal at Murray Hill Properties, Norman Sturner, said the securitization market “is just a subsidiary of the general lending market. Eventually, it’s the investment banks that bought all of these ‘bad’ loans through securitization or CMBS, or any other product they marketed. The commercial lending market in New York City has simply pulled in their horns because of either the rationalization of what they are seeing the other banks did in error, or their own bank’s mistakes.”

He added: “What we hear from our lenders when we want to borrow is loans at 65% loan to value; spreads at 120 to 150 basis points over treasury or Libor, and interest reserves if your net operating income is below the borrowing rate. No more interest only loans with high loan to values. This is not mayhem, just good business practices for both sides. The only buyers left out of the current and future real estate cycles will be the ‘part timers, and inexperienced investors’ who hiked the prices of marginal deals assuming they could borrow 90% or more without amortization. These people over bid everyone else without looking to payback. That cycle is no more, until the next time.”

Other leaders have varying views on the state of the real estate capital market. “We are starting to see tangible effects of the national sub prime issues in the form of layoffs in the financial sector, particularly mortgage brokers, and lenders tightening their underwriting requirements,” the chairman at Massey Knakal Realty Services, Robert Knakal, said. “That being said, the lenders tend to be renegotiating and not pulling back completely.”

A principal at RCG Longview, Jay Anderson, said: “I think it will get worse before its gets better as we have not seen defaults in the CMBS world as in the sub-prime world.”

Mr. Anderson, said: “Well here is the self fulfilling prophesy, expect defaults each and every month when bridge and mezzanine loans come due which cannot be refinanced. Call it extensions; call them defaults, your pick.”

The president of Newmark Knight Frank, James Kuhn, said: “There is still much too much equity in the system and although there is a shift in underwriting standards and widening of spreads, the private equity firms will keep the pricing levels at so slightly below where they have been for some time.”

Mr. Kuhn said the credit market could make new development “suffer.” “This pricing adjustment will exacerbate the problems created by the uncertainty with volume caps for residential 80/20 projects, and the new 421-a legislation. This perfect storm will be mostly likely felt in the outer boroughs where the number just won’t work.”

Mr. Beninati of Antares said: “In the next six months a whole new cast of capital market buyers will emerge seeking yield in a world awash with capital and seeking returns. Remember the fundamentals of real estate, the world economy drives the credit markets and the CMBS markets are a part of the credit market. CMBS is the tail, and the world economy is the dog, and it is one big, strong dog these days.”

The managing director at RBS Greenwich Capital, Chuck Rosenzweig, said: “The capital markets have provided very significant liquidity for commercial real estate over the last several years. Each year, loan pricing got cheaper and leverage and loan terms more aggressive. This liquidity has had a big impact on the price appreciation we have seen at the asset level. Now we are seeing that the benefits of all of that liquidity can change very quickly and those changes do not need to be directly connected to real estate fundamentals.”

He continued: “Going forward, the lenders with stronger balance sheets and longer term commitments to be the space will be back and some smaller, recent entrants may not be back in the market. Although painful in the short-term, these corrections are healthy as many would agree that the pendulum had swung too far in the other direction. Liquidity will come back but credit spreads for loans will settle at a higher level and there will be more differentiation from lenders and investors across asset classes, buildings, and sponsors.”

As I reported last month, investment sales and properties under contract to be sold exceed $31.2 billion for the first six months of 2007. If the predictions of real estate leaders of doom and gloom come to fruition, what can we expect to see over the next six months?

Over the past few weeks properties in New York City have continued to be sold and go into contract. Last month, Boymelgreen Developers closed on the sale of the 15-story, 172-unit residential rental apartment building at 323 W. 96th St. The property was sold for about $75 million, or $436,000 a unit on a site that has a 99-year land lease. The property was completed in 2003 for a cost of $34 million.

Last week, Kushner Companies announced it entered a contract to purchase the 225,000-square-foot building at 321 W. 44th St. from Thor Equities for $87.5 million.

Properties in Herald Square continue to trade at record prices. Last week, a partnership of Charles Borrok and investors entered a contract to sell its 560,000-square-foot office building 14 Penn Plaza at 225 W. 34th St. for $350 million, or $625 a square foot. As I reported last month, a local investor will pay about $70 million on the purchase of the 162,500-square-foot Children’s Wear Building at 131 W. 33rd St. The property was acquired in March by a joint venture of the City Investment Fund and Savanna Management for $43 million.

I concur with Robert Knakal when he says, “With the tremendous capital that has been created and that exists worldwide which is looking to be deployed into New York real estate, I am confident that this ‘blip’ will not have long-lasting profound effects on our market. More equity requirement is not necessarily a bad thing.”

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