President and founder, Real Capital Analytics Inc.

Jennifer E. Garrett

As published in Scotsman Guide's Commercial Edition, September 2008.

Keeping pace with changes in the commercial real estate market seems nearly impossible. Yet Real Capital Analytics Inc., a research firm that focuses on commercial capital markets, aims to do just that. Despite the near disappearance of commercial-mortgage-backed securities (CMBSs) from the market, Robert M. White Jr., the firm's president and founder, sees some positive trends.

How can the industry respond to decreased CMBS issuance? Capital always finds the areas it's needed. We're certainly starting to see new funds created, whether they're out to buy distressed mortgages or originating mezzanine loans. That's all part of the solution to the problem.

Ultimately, confidence has to be restored in the underwriting. The industry has a lot to do to restore confidence, but more conservative underwriting will certainly help.

How are global trends affecting U.S. markets? More people are looking abroad. [Investors] of risk capital [are] looking at emerging markets, and emerging markets are definitely capturing much more of it. And even institutional capital -- the pension-fund money -- its allocations to international investments have grown something like fourfold in the past two years and are rising.

The U.S. is benefiting because we are also starting to see a fair amount of foreign capital [invested in] U.S. properties.

How are international markets feeling the U.S. credit crunch? The transaction volume is down more severely here in the U.S. than in any other country, but it's also off fairly significantly in Europe.

Europe has not seen the same drop in transaction activity, but it already has experienced greater declines in prices than we have here in the U.S. so far.

Do you anticipate seeing the same drop here? We will continue to see prices decline. I don't expect to see them fall off the cliff.

The biggest difference is that so far the sellers in the U.S. have been fairly strong. Although they have a lot of property on the market, they are not accepting prices that are too cheap.

I think mortgage delinquencies are a good barometer of the pain and pressure out there, and they're still at fairly low levels. They've been increasing, but they haven't been spiking.

What does the future of capital markets and the commercial mortgage market look like? At least for the U.S., there's still a lot of capital that [investors] want to be in real estate. Certainly, no one is anxious to invest in the stock market. With inflation looming, bonds don't look too appealing. In fact, inflation makes real estate look more attractive.

We're already seeing some of that capital starting to filter into the debt market through mezzanine [financing]. If we can start getting a little debt liquidity, and we are able to skirt a major recession, things could turn around fairly quickly. Those are big ifs, though.

Jennifer E. Garrett is an associate editor at Scotsman Guide. Reach her at (800) 297-6061 or jeng@scotsmanguide.com.