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CAPITAL MARKETS OVERVIEW
Conduit lenders accounted for approximately 45 percent
of commercial lending over the past 12 months and
have been impacted the most by the liquidity crunch.
Fortunately, the 10-year Treasury yield has declined 60
basis points from its mid-June peak, helping to offset
higher lender spreads. It is interesting to note that
spreads today are relatively close to historical norms, but
the rapid shift in the market is nonetheless proving to be
a challenge for investors. Some conduits have temporarily
pulled out of the market in anticipation of the return
of additional liquidity. As a result of lender uncertainty,
some borrower applications are being returned and confirmed
rate locks are being broken.

Alternative sources to conduit lenders are stepping in.
Spreads have increased across the board, though the
CMBS market has been the most affected. Local and
regional banks are taking advantage of this opportunity to
gain market share, and some are offering loans without
prepayment penalties. Borrowers can also look to life
insurance companies, or to Fannie Mae and Freddie Mac
for multi-family loans. A variety of solutions are being
implemented with these lenders to facilitate transactions,
including seller carryback, bridge debt, short-term variable
debt and assumable financing.

Lenders are mitigating risk by underwriting new loans
based on actual NOIs, raising debt service coverage
(DSC) ratios and lowering LTV requirements to the 60 to
70 percent range, compared to 75 to 80 percent a few
months ago. In some cases, borrowers are finding that loan
applications previously accepted based on strong DSC of
1.25x or higher are being re-priced with reduced loan proceeds,
as underwritten cash flows no longer meet minimum
DSC requirements. Some transactions have fallen out
of contract as a result of leverage gaps, requiring more
buyer equity. Lenders are driven by asset quality, strength
of the local market – as defined by employment and demographics
– and the financial strength of the buyer.

Financial markets are anticipating the Fed’s next big
move. The Fed’s $38 billion injection in early August was
the largest infusion since 9/11. In the weeks that followed,
the Fed’s addition of another $24 billion in liquidity and a
50 basis points reduction in the discount rate have helped
to calm financial markets, for now. Investors are widely
anticipating a Fed funds rate cut in September. Credit
cards and home equity lines are tied to the prime rate,
which is influenced by the Fed funds rate. While tight
labor market conditions, wage growth and high energy
prices remain concerns on the inflation front, further
slowing in the housing market, deteriorating consumer
credit, and the possibility of a prolonged economic downturn
are likely to influence the Fed’s decision.