Mired in one of the longest credit sieges in decades, commercial mortgage bankers are slashing expenses and cutting jobs to mitigate plummeting revenues. Only $137 billion in commercial property sales closed in 2008, a 72% plunge from the amount sold in 2007, according to a preliminary report by New York-based research firm Real Capital Analytics.

To survive and grow in this bleak climate, financial intermediaries have returned to Customer Service 101 by working with borrowers who need to refinance or restructure loans. On the other side of the ledger, mortgage bankers are helping lenders find sound investments, or move loans off balance sheets.

A lack of demand isn't the biggest challenge facing financial intermediaries, mortgage bankers say, not with $530 billion in U.S. commercial real estate debt maturing over the next three years and $160 billion coming due in 2009. In the post-commercial mortgage-backed securities (CMBS) world, the real test comes down to finding capital solutions and terms with which all parties are comfortable.

Last year, CMBS issuance in the U.S. totaled roughly $12 billion, a miniscule amount compared with $230 billion in 2007. Thus, a yawning financing chasm exists that life insurance companies, banks, government-sponsored entities (GSEs) and other lenders combined can't fill. That's one reason real estate officials are lobbying for federal bailout funds.

“Right now only the very best sponsorship in deals with the very best real estate and underwriting are getting done, but it's exceedingly hard,” says John Pelusi, CEO of Pittsburgh-based HFF Inc. “We are uncovering every single nook and cranny in the capital markets today, whether it's debt, mezzanine financing, preferred equity or straight equity to fill a financing gap.”

Leveraging relations

But the deals mortgage bankers are able to complete aren't enough to maintain growth. HFF laid off 12% of its workforce in the fourth quarter, reducing the number of employees to 433. That move followed the company's reported revenues of $106.8 million through the first nine months of 2008, a 47.5% decrease compared with the same period in 2007.

HFF (NYSE:HF) closed at $2.34 per share on Jan. 15, a 70% decline from its 52-week high in February 2008. By comparison, on Jan. 15 the Dow Jones Industrial Average was down 41% from its 52-week high in the spring of 2008.

Even so Pelusi remains upbeat about his company's position. He counts relationships with life insurance companies, community banks, GSEs and other lenders among HFF's most valuable assets. Those associations give HFF and mortgage bankers with similar relationships an edge over brokers that relied heavily on the CMBS market for financing, he says.

Case in point: Financial intermediaries are increasingly bringing together several lenders in so-called “club deals” to finance transactions that exceed $50 million or that involve riskier property types such as hotels and retail centers. Last fall, for example, HFF assembled six banks to recapitalize a West Virginia mall for Columbus, Ohio-based Glimcher Realty Trust. The transaction totaled $40 million, and each bank chipped in between $3 million and $17 million.

“I don't think anybody's quite been through what we're going through now,” says Pelusi, referring to the length and depth of the credit crisis that started in the summer of 2007. “But this is when exceptional companies distinguish themselves and when the mediocre players get weeded out.”

Follow the money

HFF isn't alone in cutting costs or in its intent on grabbing market share. Los Angeles-based CB Richard Ellis Group, which operates mortgage banker CBRE Capital Markets, is cutting nearly $200 million in expenses; about half is in staff reductions and curtailed compensation.

CBRE Capital Markets executives declined to identify how much the cost cutting is affecting their department other than to say the division is resizing. But the group reported $71.9 million in revenue from commercial mortgage operations during the first nine months of 2008, a 42% drop from the same period in 2007.

To promote growth, CBRE Capital Markets also is reaching out to a diverse group of lenders to consummate deals, says Brian Stoffers, president of CBRE Capital Markets. Some capital sources may have been too narrowly focused on a certain deal structure or property type to warrant attention for most transactions 18 months ago. Today, mortgage bankers are hitting up lenders for an array of financing opportunities.

“The people that are staying in this business are following the money,” he says. “They're trying to find deals for those capital providers that have money to put to work.”

In some cases the strategy is working well for lenders. In December, CBRE Capital Markets arranged a $31.4 million recapitalization of a 500,795 sq. ft. warehouse owned by the Magellan Group, an industrial landlord in Southern California. Mesa West Capital of Los Angeles provided $25.6 million to Magellan, while Penwood Select Industrial Partners II, a co-mingled real estate investment fund, financed the balance with mezzanine debt.

The deal formed after Magellan's initial lender, an unidentified investment bank, couldn't securitize a 10-year, $45 million loan it originated in 2007. Eventually, the bank sold the note back to Magellan for about 65 cents on the dollar.

The financing marked a broadened Mesa West strategy. In the past, the lender generally focused on providing short-term, first-mortgage bridge loans on non-stabilized properties that provide some upside opportunities. But the dislocation of the capital markets has given the firm additional financing opportunities, says Jeff Friedman, co-CEO of Mesa West, which generally charges interest rates of between 7.5% and 9.5% for its debt.

“These are still bridge loans — borrowers are getting short-term financing pending the recovery of the credit and investment sales markets,” says Friedman, whose firm has raised $400 million to fund first mortgages. “We now have the opportunity to make lower-leveraged loans on cash-flowing and stabilized properties with great sponsors.”

New reality

Beyond locating willing capital providers, mortgage bankers have had to adjust expectations within their employee ranks. At Bloomington, Minn.-based NorthMarq Capital, for instance, the average annual fee revenue generated by each producer approached $1 million a few years ago when a borrower with a heartbeat could secure a loan.

As a result, producers were making $400,000 to $500,000 a year, says Edward Padilla, CEO of NorthMarq. But last year production volume dropped to about $6.5 billion from an average of about $13 billion in each of the past three years.

“If a producer is making $150,000 to $200,000 a year on fee revenue of $400,000, it's not the end of the world. That's your successful producer,” says Padilla. “We have to readjust our perspective back to what is normal and what we think success is.”

Just how long NorthMarq and other mortgage bankers must maintain those truncated expectations is a question that executives of financial intermediaries can't answer. They predict that, at some point, debt markets will stabilize. But they're also quick to point out that the real estate credit logjams in the early 1990s and early this decade lasted nowhere near as long as the current crisis.

Jack Cohen, CEO of Chicago-based Cohen Financial, suggests 2009 could be worse than last year. Then in 2010, he adds, financings and problem loans could overwhelm the system unless a broad base of willing capital materializes to replace the CMBS market. “I don't think this is a passing fancy,” Cohen says. “This could last as long as three to five years.”

Joe Gose is a Kansas City-based writer.