Last week the annual MBA CREF conference took place Atlanta. This conference has historically provided an early barometer of the real estate capital markets for the upcoming year and with that in mind, many attendees will rely on the conference to help set their course for 2012. Based on the energy level at the conference it appears that everyone is optimistic about 2012 and at the same time realistic about the fact that macroeconomic conditions, specifically the European debt crisis, pose market uncertainty that can’t be fully quantified. This undercurrent of uncertainty is also partly due to the fact that rosy predictions made a year ago for 2011 didn’t quite pan out, particularly for CMBS.

One thing we’ve seen at Partner is this caution trickling down to the physical due diligence world. It is apparent in our projects that CMBS lenders have more stringent underwriting standards and greater legal review than in years past. Additionally, because agency lending is going strong and portfolio lenders and insurance companies have the ability to be picky about their deals, we are seeing that the assets that best fit into the current CMBS box are often class B and C type properties in tertiary markets. With these property types, and the greater level of scrutiny and review, good physical due diligence (Phase 1 Environmental Site Assessment reports and Property Condition Reports) are more important than ever.

Another trend we’ve seen is an uptick in work from special servicers. The current delinquency rate for CMBS is approximately 9.5% representing a loan value of over $57 Billion and with the large amount of CMBS rolling in 2012 our special servicing clients are bracing themselves for the inevitable maturity defaults that they will be forced to deal with this year. Physical due diligence for special servicers often requires a greater level of detail, such as Property Condition Reports with specialists to inspect certain building systems, to better value the asset and determine the disposition strategy.