Reis Inc.'s message during its fourth quarter 2007 capital markets briefing was, “Worry. Don't panic.” The New York-based commercial real estate information firm confirmed that cap rates for commercial properties inched upward in the final stretch of 2007, and that deal activity slowed across all sectors. The trend is expected to continue in 2008, Reis' chief economist Sam Chandan said, but the drop will be less dramatic than in the last six months of 2007.

The shift, he said, will be due primarily to the exit of speculative investors rather than deteriorating fundamentals. Faced with a tighter credit pool and an uncertain economic climate, buyers focused solely on price appreciation have backed away from acquisitions. Considering the industry is coming off a historic high for transaction volume, there won't be lasting damage, Chandan said.

“Fundamentals remain exceptionally stable,” he said. But, “pressure on prices of distressed sellers will become a significant factor later this year. “

The lack of financing has been a major contributor to the drop in deals. Specifically, after reaching a record high of $38.5 billion in March 2007, issuance of U.S. commercial mortgage-backed securities (CMBS) ground to a complete halt in January. February was just a little better with $1.2 billion in issuance, down from $21.1 billion in February 2007, according to Commercial Mortgage Alert. Bond investors are insisting on greater transparency, Chandan said. Overall, the volume of issuance of new CMBS bonds is expected to reach between $85 billion and $90 billion in the U.S. this year, down from $230 billion in 2007.