NREI recently spoke with Mark Fisher, senior director at commercial mortgage banking firm LJ Melody & Co. in New York City, about the extremely torrid investment sales market for office buildings. Instead of calling for its end in 2005, Fisher believes that torrid may have become a status-quo state for the real estate capital markets.

NREI: Office buildings are selling like crazy right now. But are lenders drawing the line at any building with deep vacancy? Fisher: Office vacancy is not significantly problematic at this time. Properties where the new buyers is repositioning the buildings to decrease vacancy is viewed as a "positive" in the market and has no trouble attracting competitively priced capital.

NREI: Capital is flooding the New York City office market. Has activity been growing or weakening over the past few months? When do you think it will it end? Fisher: If anything, there is more demand now than ever before with seemingly no end in sight. Intellectually, we know it has to end sometime but there are no signs that the market is either ending or slowing down.

NREI: Could this be a structural change in the market? Fisher: Historically, real estate has been an excellent investment. The advent of REITs and CMBS have made the markets more efficient by making all of their information available through public offerings. This scrutiny has made real estate much more accessible, easier to analyze and thus a much more viable investment vehicle for a much broader field of investors.

NREI: Has the slight uptick in interest rates had any real effects on lending activity yet? Fisher: 10-year Treasuries at 4.10% are still considered to be extremely low. What has changed dramatically are spreads. With the increased percent of AAA’s and the decrease of B paper, CMBS bond offerings have a much higher quality and are thus commanding much tighter spreads. This is passed on to the market.

NREI: Can you give an example? Fisher: Take a 65% loan-to-value, 10-year, fixed-rate, interest-only loan we just put together at a spread of 85 over the 10-year treasuries. The "all-in" rate is only 4.95%! Everybody seems to be locking in these rates, even if it means paying a prepayment penalty on existing loans.