With a paucity of new capital coming into the system and many loans maturing, most property owners have limited options. In some cases the value of the property has fallen below or near the loan balance. Most lenders appear to be opting to extend with modest pay downs. This explains why fewer borrowers are refinancing. The option with the least friction for borrowers is to ask for a loan extension. These extensions differ from securitized loans and non-securitized loans.

Borrowers who have securitized loans maturing must deal with special servicers. When the loan is likely to go into default or in default, the securitized loan moves from the master servicer to the special servicer. In most cases, special servicers are determining whether the extension will create a higher NPV than foreclosure. Most extensions are for one year and could involve a loan pay down, increase in interest rate or increased reserves. Commercial banks are dealing with extension quite differently. Unlike the special servicer, the banks are not entirely motivated by an NPV analysis. The banks will consider the same evaluation but also consider the borrower’s relationship with the bank. Most bank extensions can involve a pay down in exchange but the extension period is often greater than a year.

Loan extensions are solving the borrower’s short-term need to avoid foreclosure, but they are also causing the lender to defer the problem, hoping for improved market conditions down the road. And this is the big question – what will leasing, the debt and equity markets, cap rates and the cost of debt be down the road.

If loans are not extended and properties foreclosed or handed back to the lender, the rapid drop in property values could lead to greater short-term stress on the financial institution and ultimately nearby property owners. Neither the extension nor foreclosure option is ideal, but for the time being loan extensions are solving the borrowers and lenders short-term needs.

With next month’s U.S. Open back in nearby Bethpage, New York, it seems timely to consider how real estate, like golf, needs good support to create high performance over a career. Knowledgeable golfers understand the importance of Fanny Suneson, the caddie, who supported and guided Nick Faldo during his four major championships and who recently supported Henrik Stenson during his win at the Player’s Championship, golf’s “fifth major”. Additionally, “Freddie” Couples is known for his calm demeanor during stressful rounds and his clutch performances that have propelled him to captain of the American team during this fall’s Presidents Cup.

For those who do not play golf, or deal regularly with multifamily assets, the connections of “Fannie” and “Freddie” in both golf and the investment real estate industry may be missed. The competitive programs offered by Fannie Mae and Freddie Mac have buoyed the multifamily asset class and have allowed multifamily buyers to purchase at still attractive yields. These programs offer up to 80% LTV, some interest-only financing, and sub 6% interest rates, which office, industrial and retail buyers are no longer able to achieve. We recently closed a $42 million, 436- unit apartment portfolio sale in suburban Hartford, Connecticut, using this debt platform and will seek similar financing options for four separate multi-family deals (1,561 total units) we will be brining to market at the end of this month.

The Freddie Mac and Fannie Mae platforms, especially the fixed rate programs of Fannie and the capital market ARM programs of Freddie will continue to play pivotal roles, guiding and stabilizing prices similar to impact their golfing counterparts have had on the game.

There appears to be an increasing air of optimism among real estate owners and investors with the recent increase in housing starts and apparent stabilization in the stock market. However, financing remains limited and expensive as spreads remain very wide and LTV’s very low.

Unlike the early 1990’s, when banks and the FDIC dumped real estate assets, the banks today are exercising far more patience and appear willing to hold and manage foreclosed assets until pricing improves. Based on the proposed federal assistance that the feds plan to give to banks and the relaxation of mark-to-market accounting sales, we expect many banks will partner with third party real estate operators to augment the condition and ultimate value of their foreclosed assets.

With further white collar layoffs projected, certain office markets will face increased pressure on rents and occupancy. Apartment projections are holding up best among all of the food groups, despite slightly increasing vacancies.

Overall, investors for multi-family and industrial assets are moving off the sidelines while many retail and office investors remain cautious.

As we approach the 2nd quarter of 2009, several trends are becoming apparent:

Many institutional owners are under pressure to sell assets in order to redeem capital to their investors and, in some cases, to avoid violating loan covenants.

Special servicers for CMBS commercial loans in default appear increasingly willing to provide time to negotiate terms. Many want a pay down in the debt balance – most start foreclosure proceedings at default.

Strong regional and National banks are making more acquisitions and refinance loans, particularly for well capitalized owners. Their terms are often more competitive than life companies and CMBS lenders.

New “private capital” and offshore buyers are entering the market while most public REITs and pension funds remain on the sidelines. Private capital will account for an increasing share of acquisitions in 2009.