Market Outlook

Financial markets and the commercial real estate sector

are in the midst of a somewhat unique shift. Similar to

past turning points, excesses during the run-up are

causing a traditional investor pullback as risk is repriced.

During the first quarter of 2008, however, a full-blown credit

crunch emerged, with much different characteristics than in

past cycles, due to the very nature of the financial engineering

that fueled the boom. The pooling of a broad range of

home loans, including high-risk subprime mortgages, into

Mortgage-Backed Securities (MBS) made it easy and temporarily

profitable for lenders to increase originations and

relax underwriting standards. Home sales soared well above

real demand drivers, leading to overbuilding and significant

speculation. Poor risk assessment by ratings agencies and

investors in these pools resulted in an underestimation of

potential defaults, particularly for adjustable-rate subprime

loans that reset at dramatically higher interest rates. The wide

use of related complex financial instruments and derivatives

tied to MBS further exacerbated the risk and has made it difficult

to quantify and reprice the now-troubled portions of

these investments. The resulting liquidity crunch emerged as

uncertainty regarding the magnitude and true “market”

value of these securities pushed investors to the sidelines and

led banks to tighten lending standards across the board.