It’s déjà vu time again in Las Vegas, where there seems to be a permanent Rat Pack soundtrack playing — you can’t enter an elevator or almost any indoor space without hearing Frank or Deano or Keely Smith or another 1950s swinger on the Muzak. The sprawling Las Vegas Convention Center may also be playing these tunes, but you can’t hear it over the enthusiastic din of what the ICSC says is a record crowd — 46,000 — for its annual spring convention.

There is also a familiar feeling about the show itself: As in the past three years, everyone is celebrating the industry’s great fortune in the preceding 12 months and then quickly pointing out that THIS CAN’T LAST MUCH LONGER: The cycle will slow and the piper will be paid.

This afternoon investment broker Marcus & Millichap presents its annual ICSC update, during which the firm’s chief marketing officer, Hessam Nadji, says he will “sound a note of caution.” While macroeconomic trends remain healthy and retailers have continued to rack up gains, Nadji says that slowing GDP growth, starting in the back half of this year or in 2007, and the end of the housing bubble signal the beginning of the end of the cycle.

The slowdown in housing — measured by inventories of condos and existing homes that are up as much as 86% over last year and a nearly 50% deceleration in appreciation rates — is particularly significant for the retail sector. With interest rates rising, the refi party is finally over. Nadji says the volume of refinancing will fall from about $260 billion in 2006 to as little as $150 billion this year, which would translate into something like $70 billion less in consumer spending. Meanwhile, with inflationary pressures in the economy from a strong job market and a falling dollar, Nadji expects interest rates to continue to move up. The message to retail real estate owners is that cap rates will follow. Nadji’s advice is to diversify assets and work hard on improving operating returns to make sure that it is improving NOI, rather than falling values, that drive the increase in cap rates…

…A convention session on Monday, billed as “Permanent Financing Outlook,” focused exclusively on what all the participants regard as a temporary phenomenon: a lending environment that has become detached from the realities of industry fundamentals. With lenders competing to get money into the market, it’s a great time for borrowers — too good to last.

Michael J. Mazzei, managing director of Barclays Capital, described the current situation as anomalous and untenable. “There’s a huge amount of engines that have to put out money,” he said. The need to make deals — despite compressed cap rates that make many buyers hesitate — has led to lower lending standards and enabled some incautious buyers to bid up asset prices. “In the past year the cap rate compression we have seen has not been fueled by demand or by a love of real estate fundamentals,” he said. “It has been fueled by lenders.”

How loose has underwriting gotten? The panelists all insisted that their firms walk away from situations in which they would have to bend their underwriting rules to win. But they eagerly cited examples of other lenders who do. The combination of aggressive lenders and borrowers who are smart enough to press their advantage has produced loans that would have been unheard of a few years ago — 80% or 100% leverage on properties that cannot even produce one times debt coverage, long-term interest-only products, minute spreads and lots of goodies, such as vastly reduced penalties for conversion to fixed. All of these add up to a huge subsidy to borrowers that can’t be sustained and that is already cutting into lender profits. “I know lenders who doubled their volume last year — and saw their revenue go down,” says Mazzei.

How will it all end? At some point, interest rate increases and stubbornly low cap rates will collide. “You can’t buy stuff at a 5, 5.5 or 6 and pay 6% interest. That won’t work,” Mazzei says. “When the ___ hits the fan, there will be a lot of scrambling, but also a lot of opportunity.”

The opportunity will be for lenders, rather than borrowers, the panelists agreed. Lenders and investors will make money — probably more than they are making now — on restructurings, distressed debt, workouts, etc. When the correction does come, the panelists said, the enormous liquidity that has been created in the CMBS market will help cushion the blow.

Richard Katzenstein, senior managing director of MMA Realty Capital, took a longer view of the current real estate investing cycle, noting that after the dot.com market blowout and the collapse of Enron, investors flocked to hard assets. That has had a salutary effect — by repricing real estate more realistically in relation to other investments. “The risk premium in real estate was too high versus other asset classes,” he said. “That’s real and that should stick. But this is an extreme situation now and no extreme is good.” The bottom line: Get ready for a nice soft, well-organized crash — or maybe something a bit more chaotic. But, when the smoke clears, says Mazzei, the markets will have proved their resilience: “The market will correct itself, but sometimes we have to break it first.”