Reflections on the Market Correction: The Subprime-Induced Market Correction Has Many in the Commercial Real Estate Finance Business Tightening Underwriting and Getting Back to More Conservative Lending. A Group of Capital-Markets Experts Gathered Recently on a Panel to Reflect on Just How the Correction Has Altered the Business

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For some time last year, it seemed the capital markets might remain somewhat insulated from the challenges facing the real estate finance industry as a result of the subprime mortgage difficulties. But when the ripples spilled over into the commercial mortgage sector in midsummer, it quickly became clear that was not the way it would be. In a matter of just a few days, it seemed commercial mortgage investors began to bail out, interest rate spreads widened and "old" underwriting rules were thrown out the window. [??] The reaction by many to this was surprise and puzzlement. In the months since, I have been asked countless times what, exactly, has happened in the capital markets. How could a meltdown in the residential subprime market have such a dramatic effect on commercial real estate mortgage markets--particuarly when everything in commercial seems to be going so well? And how could this have happened so quickly, especially since our markets have been relatively healthy with respect to occupancies, rent levels and future growth potential? [??] At the International Council of Shopping Centers' (ICSC's) "2007 Texas Conference and Deal Making" meeting in San Antonio, Texas, in October, attendees had a unique opportunity to answer these questions. I had the chance to moderate an experienced panel of professionals and capital markets experts who not only discussed what has been happening in the capital markets, but brought some clarity and context to what can seem like a confusing and complex suite of issues. This panel discussed some of the macro-level developments that have led to the current state of affairs, and offered a detailed breakdown of how these issues might impact the industry in the near term as well as long term. They offered forecasts of how long these difficulties may last and what kind of long-term effect they might have on the industry. Perhaps most important, they provided some analysis of how the subprime mortgage struggles might influence the day-to-day operations for those of us in the industry.

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Some of the questions explored by the panel included:

* Is this really a credit crunch?

* How does subprime affect my retail deal?

* Will cap rates go up?

* How long will this capital realignment take?

* Is there bad news hiding in the commercial mortgage portfolios?

* Who's "in" and who's "out" of the capital market?

The resulting discussion provided an in-depth evaluation and summary of what this all means for the commercial real estate mortgage industry. Some intriguing predictions about where we go from here were also offered.

The ICSC panel was composed of four individuals representing four different corners of the capital markets. Distinguished panelists from the commercial mortgage-backed securities (CMBS), mezzanine, bank and equity sectors were invited to offer as wide an array of perspectives as possible. Panelists included Davis Deadman, Dan Smith, Jef Elm and Rex Paine.

A brief rundown of the panelists' backgrounds will help portray the segment of the industry they were chosen to represent.

As chief executive officer and one of the founding executives of NexBank SSB, Dallas, Deadman was formerly a team leader and partner with Highland Capital Management, where he managed a $2.6 billion investment portfolio. His duties included overseeing real estate equity investments for the firm.

Smith is managing director of RBC Capital Markets' Real Estate Mortgage Capital Division, Dallas. He is responsible for leading the commercial real estate CMBS lending program throughout the United States. He has been involved in the commercial real estate lending business for the past 25 years, and has originated more than $25 billion of commercial transactions in the United States and Canada.

Elm is a senior vice president and the U. …