New York -- In his own inimitable style, Sam Zell probably said it best at a recent luncheon, "The real estate industry is now competing for funds, and it must learn to perform in accordance with expectations." Zell's statement applies to real estate investment trusts (REITs) as well as the commercial mortgage backed securities (CMBS) market, both of which have brought real estate and Wall Street together on the world's capital markets stage.

Zell's comments were a fitting finale to a successful four-day conference recently held in New York on commercial real estate finance and securitization, sponsored by Frank Fabozzi/Information Management Network, Ross-Dove Co. and NATIONAL REAL ESTATE INVESTOR magazine.

The upshot is that real estate finance has grown more complex than ever before, and more people are trying to figure out how best to quantify and standardize an inherently unstandardizeable industry. The larger Street firms are successfully monitoring REITs with many an index, and the CMBS market, though cooling off from its heady 1994 pace, continues to present a viable financing source with some $15 to $18 billion in volume projected for this year.

Finding unanimity on any real estate-related topic can be a tough chore, but everyone at the conference seemed to agree that traditional lenders have returned to the financing market, led by banks and insurance companies.

"Traditional lenders have to be in this market," says Stephen Roth, president of Los Angeles-based Secured Capital Corp. "I can still remember being here not so long ago and hearing how the banks and insurers would never be back," says Roth. But now banks and insurance companies are bidding (often successfully) against the securities firms and are pursuing real estate plays of all kinds. In fact, Roth predicts that "conduits will go away and banks will take over the origination function."

Fierce competition for deals has forced a narrowing of spreads over the 10-year Treasury, and Street firms are complaining loudly that traditional lenders "are already repeating the same mistakes they made in the past," says David Jacob, managing director and head of research for Nomura Securities International, New York. Banks and insurers argue that they are charging reasonable spreads given the quality of the underlying assets, and that securities firms are charging higher spreads to cover the lower quality portion of their portfolios, the so-called "B" and "C" pieces.

All of which brings up the notion of ranking real estate assets much like bonds are now rated, from a high of AAA down to the lowest CCC and unrated pieces of a CMBS portfolio. Debate still rages on the ability of all members of the real estate and financing communities to buy off on such a uniform system.

The role of mortgage servicers also was highlighted. Servicers must walk a thin tightrope between owners concerned about releasing proprietary information into the marketplace and the rating agencies whose job it is to grade the asset quality. Often, servicers are put in the uncomfortable position of being the "fall guy" for not uncovering relevant information, at a time when competition for servicing contracts has become fiercer than ever and the low-cost bidder has a pricing advantage.

For now, the traditional rating used for office space is about to cause a major "sticker shock" for many Class-A tenants. When many of today's tenants were enticed into their jazzy Class-A spaces, they received concession upon concession, and at low market rates. These lower rents were built into their budgets for future operations. Now that these leases are expiring and Class-A rents are on the uptick, real estate experts including Bill Rothe, president and CEO of Newport Beach, Calif.-based Koll, are expecting a dramatic movement by these tenants into Class-B and Class-C space they can afford.

With increasing rents, will we see rampant overbuilding again? "Capital availability drives the real estate market," says Rothe. "How long is our institutional memory? It's turned out to be about five to six years. I just hope development doesn't happen for another 10 years."

So what do investors want? Rothe says it's industrial buildings, suburban office buildings of 100,000 sq. ft. and larger and neighborhood shopping centers with food and drug anchors. "We're over-retailed in most everything, yet we still build retail. There are too many retailers selling the same products," says Rothe.