In the last few years, Wall Street has dominated the real estate lending scene, serving as the undisputed force behind several record-setting quarters of commercial transactions.

Big banks like Morgan Stanley, UBS, Wachovia, Credit Suisse, and RBS Greenwich Capital provided most of the real estate capital before the recent credit crisis and market turbulence. Looking ahead, the tables have turned, and the balance sheet lenders, made up of insurance companies, savings banks, commercial banks, are now masters of the lending universe.

Industry leaders are divided on how the change of lenders will affect transactions.

The chairman of the Lighthouse Group, David Lichtenstein, said: “The small deals are being financed. It’s the big ones that are impossible to find a lender.”

“The opportunity to finance is available for less than $100 million, but there are no funds at all available for larger deals,” a prominent real estate investor, who asked to remain anonymous, said. “What financing is available is primarily fixed-rate, and at terms and conditions similar to those offered to a borrower in 2003 — with lower loan-to value, high coverage ratios, and spreads of at least 200 over and more.”

An associate at Ackman-Ziff Real Estate Group, Eli Weiss, said the credit crisis is reshaping the parameters of the lending environment, which he characterized as “the most difficult in about 15 years.”

“While commercial real estate fundamentals are still very strong, the collateralized mortgage-backed securities lenders are running into difficulties, as any securitized mortgage product encounters serious marketing challenges as a result of the subprime fallout,” Mr. Weiss said. “While domestic balance sheet lenders do not have the ‘perception’ issues that CMBS lenders are facing and are still very much in business, loans are at very different terms than from six to nine months ago. Also, since they have the pick of the litter, domestic balance sheet lenders are being extremely selective as to deals they take on. This boils down to banks and insurance companies ‘saving their powder’ for their best clients and deals that have lower-risk profiles.”

“Constructing a capital stack today requires more sophisticated financial engineering, deeper access to capital sources, and a more creative approach to structuring,” he added.

Balance sheets are indeed active in providing financing for a number of recent real estate transactions. Last month M&T Bank and Apollo Real Estate Advisors provided a $163.5 million floating-rate debt package on the purchase of the 1.2 million-square-foot former Verizon Building at 375 Pearl St. A syndicate headed by Helaba Bank and two other German lenders, Landesbank Baden-Württemberg and Bayerische Landesbank, provided a $700 million loan to a joint venture of Silverstein Properties and the California State Teachers’ Retirement System for the purchase of 1177 Sixth Ave. The Union Labor Life Insurance Company has agreed to provide a $417 million construction loan to a joint venture of Tishman Realty & Construction, Lehman Brothers, and Metropolitan Life for a new 611-room hotel to be built at West 44th Street and Eighth Avenue. Anglo Irish Bank provided the acquisition financing for a joint venture of SL Green Realty and City Investment Fund to purchase 16 Court St. in downtown Brooklyn. New York Community Bank provided the acquisition financing for a joint venture of Stonehenge Partners and Dallas-based Invesco Real Estate’s purchase of the Brill Building.

On the residential development front, industry leaders said lenders would be far more selective in 2008.

“New residential condominium projects are getting financed by mid-size balance sheet lenders, who include Banco Popular, Nara Bank, Country Bank, and Cathy Bank,” the principal of the Troutbrook Company, Marc Freud, said. “Nevertheless, the amount of debt for construction financing has been reduced to around 70% of the total cost, depending on the borrower’s relationship with the bank, the strength of the construction team, and the sophistication of the borrower.

“In the current environment, a developer should not be surprised if the percentage of debt changes downward or if the interest rate increases even after a term sheet is agreed upon and signed up by both parties,” Mr. Freud said.

The chief credit officer at Emigrant Savings Bank, Patricia Goldstein, said: “Many balance sheet lenders are back in the market, and Emigrant definitely is. Pricing has increased and loan to values are reduced, but there’s money available for good deals in most of the domestic and foreign banks that we’ve been speaking to.”

The chairman of the board of Signature Bank, Scott Shay, said the bank is actively seeking financing deals.

“The good news for real estate owners is that they can still get economic deals financed. The good news for the long-term health of the real estate market is that institutions that have to worry about holding an asset are more likely to scrutinize transactions with a view toward their viability in all seasons,” Mr. Shay said. “As an on-balance-sheet lender, relationships matter a lot, and this goes to core issues of trust, knowledge of borrower character, history with the borrower, and, of course, the overall profitability of the relationship. It often takes some time for borrowers to recognize that the needs of on-balance-sheet lenders are different from the shops where loans are only kept for as short a period of time as possible before securitization.”

Mr. Shay added: “Most on balance sheet lenders do not price just off of U.S. Treasuries, as these are really irrelevant to the profitability of banks, as the markets have decoupled. Two-year U.S. Treasuries are at 2.70%, while LIBOR is at 4.60%, an almost 200-basis-point differential. No bank can make a spread pricing off of Treasuries when deposit costs are so much higher. So most banks are pricing off of swaps and setting minimums and introducing other terms, features that make real estate loans eligible for being held on balance sheet for long periods of time.”

The managing director at Holiday Fenoglio Fowler, Evan Pariser, said, “Our New York City office was the agent for 14 real estate financing deals during the fourth quarter of 2007; transactions ranging between $1 million and $164 million. Over 90% of these loans were closed with balance sheet lenders. Local and foreign banks, along with life insurance companies, provided the financing for most of these transactions.”

“A closer look at these transactions reveals that the equity contribution by the borrowers is greater, that the loan-to-value ratios are lower, and that the cost of capital is higher than the financing transactions we closed in the first half of 2007,” Mr. Pariser said. “However, the fact remains that capital can be obtained and that borrowers have alternatives when seeking financing in the current marketplace.”

The president of the City Investment Fund, Thomas Lydon, said: “The good thing about the financing market is that there are several new lenders — primarily Irish and Scottish, who have hired experienced lending teams and are determined to build real estate loan portfolios in the billions of dollars over the next few years. The bad thing is that the market terms are much more stringent than the most recent credit terms.

“However, real estate owners and developers are very adaptive and will quickly figure new ways to structure deals. The key thing is liquidity. Price just affects the cost of doing business, and transaction prices over the next few months will reflect this new marketplace. This readjustment will be painful, but manageable for most players in the New York City real estate circles,” Mr. Lydon added.

The regional director for real estate at Bank of Scotland, John Gunther-Mohr, said: “The Bank of Scotland fits the profile of a balance sheet, relationship-oriented lender, interested in continuing to work with our existing customers. From our perspective, terms are back to where they should be: Construction risk deserves 200-plus pricing in most cases, and an element of recourse is usually required to get a deal done now.

“These are not radical or onerous concepts, in my view, but reflect typical conditions of only a few years ago. We expect that relationship lenders with size and financial strength will have a compelling story for at least a few years, as the memory of the last year’s disruption will be slow to fade,” he said.

The managing director and president of ING Real Estate Finance (USA), David Mazujian, said: “ING is an active balance sheet lender focusing on leading institutional sponsors such as funds, advisers, well-capitalized regional and national developers and REITs. With the uncertainty in the real estate debt markets, ING has kept its doors open, especially to longtime relationship clients.

“December 2007 was perhaps one of the busiest year-ends in recent memory. Closings in the last few weeks totaled several hundred million dollars across the office, residential, and lodging sectors. In-place cash flow and going-in debt service coverage is paramount. Leverage is more modest and 60% to 65% is the new 75% leverage,” he said.

The group manager of structured real estate finance at M&T Bank, Peter D’Arcy, said: “We are opportunistic, but mindful, that the lack of liquidity and the backdrop of a slowing economy translate to higher levels of risk across the board. We, however, have been able to identify strong lending opportunities in this challenging environment, as the competitive landscape allows us to win business without sacrificing structure or our returns.”

“In a nutshell, we are actively lending in circumstances where we are taking appropriate risks for the senior debt slice, as opposed to taking on quasi-equity risk, which in retrospect was routinely being absorbed by senior lenders and being passed along to investors via the securitization market,” Mr. D’Arcy said. “The lenders who are active tend to have a relationship-based platform as opposed to a transaction-oriented shop.”

The chairman of Intervest National Bancshares Corp., Lowell Dansker, sees the changes in the lending environment as a positive turn of events.

“The financing marketplace of the last five years was a distortion of what historically has been a relatively steady market. Portfolio lenders have funds available for real estate. Income-producing properties including multifamily, commercial, and retail are being actively bought and sold,” Mr. Dansker said. “Rent levels have been sustained, and we have been presented with excellent opportunities. The New York market continues to see activity at lofty price levels. The city is being buoyed by foreign investors who recognize the inherent value of the capital of the world and its ‘bargain’ prices as compared to other world financial centers.

“Traditional banks remain open for business for sensible commercial real estate financing. Generally, the banks have returned to underwriting standards that are not warped by pressure from conduit lenders. Financing for acquisitions and refinancing of existing loans is now moving at a steady pace. Deals with realistic economic scenarios are being financed by portfolio lenders at favorable rates and terms. The loan-to values have returned to levels that are not inflated, and full-term interest-only loans have become a thing of the past,” he said.

“Both buyers and lenders must re-establish their comfort zones, and the hesitation and uncertainty will evaporate over time. Real estate lending is an integral part of profitable commercial banking. There is no shortage of money, but there is some disconnect between what a borrower may want and what a bank may lend today,” Mr. Dansker said.

Nevertheless, commercial property continues to sell in this environment. “‘Alive under 125’ is the present operative phase,” the chairman of Eastern Consolidated, Peter Hauspurg, said. “While following the events of August I was extremely apprehensive about continued trading volume, contracts executed since then have proven me wrong, both with regard to continued deal flow and pricing sustainability.”

“We just set a record pricing for a hotel development site in the financial district. Other transactions include a contract for a residential site at 23rd and Second Avenue for over $500 per square foot for a condominium development. Multifamily rental deals are as strong as ever, with sub five cap rates still the rules, with tons of equity and debt financing for it. Sales of well-located retail properties seem to be even still pricier than last year. Office buildings under $100 million are still in way short supply given still overwhelming demand,” he said. “The real question going forward is the behavior of the consumer and employers this year.”

I concur with Mr. Weiss when he says, “In today’s financing market, borrowers need to recognize that these shifts in lenders from Wall Street to balance sheet will most likely translate to lower leverage, higher cost of capital, and the potential for some level of recourse. Nevertheless, capital is available and transactions will continue to be sold and financed.”

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.