Talk about a 180-degree turn. The once turbo-charged commercial real estate financing market stands now largely idle. Lending volume plummeted 80% in the fourth quarter of 2008 from a year earlier, according to the Mortgage Bankers Association (MBA).

The reasons for the falloff are many. For starters, the recession has put the brakes on developers' plans for new construction and renovation. Meanwhile, acquisition financing has dried up along with commercial property sales, which fell 84% year-over-year in the first quarter, according to Real Capital Analytics.

The only steady demand is for long-term mortgages to refinance maturing debt. The chief source of that funding — conduit loans — is on hiatus until the commercial mortgage-backed securities (CMBS) market stabilizes.

While life insurers are filling a portion of that long-term demand, many of these institutional giants are dealing with their own capital constraints. Financial intermediaries have found an unexpected ally in community banks, which have been largely unscathed by the balance-sheet issues that haunt national lenders. Yet there simply isn't enough long-term debt available to refinance all the loans reaching maturity.

The last action lenders want to take at this stage of the game is to foreclose on hundreds of properties and attempt liquidations in a market where few assets are selling and dispositions may not recover the amount still owed on a mortgage.

In fact, lenders are committing most of their time and capital to staving off a potential wave of foreclosures. For borrowers who are unable to obtain permanent financing to replace mature debt, lenders are attempting to extend loans until market conditions improve.

Time to recover

A case in point is KeyBank Real Estate Capital. The direct lender is extending many of its short-term loans coming due by up to three years. In exchange, KeyBank is asking its clients for more conservative underwriting terms to reduce the risks associated with short-term deals.

Through extensions, the bank is helping its commercial real estate borrowers avoid foreclosure and stay in business until they are able to pay off their loans, explains Clay Sublett, national production manager at Cleveland-based KeyBank.

Three years may seem like a long extension for acquisition, bridge and construction loans that may have carried only two-year terms originally. But KeyBank executives reason that shorter extensions might not be enough to carry their borrowers through the credit crunch. “We're saying, ‘Let's give them a more meaningful maturity so we can see them past the current market upheaval,’” Sublett says.

KeyBank provided $7.7 billion in financing to the commercial real estate industry in 2008 after lending $21.9 billion in 2007, a drop of 65% year-over-year. The bank continues to originate financing for health care properties, including seniors housing, and government agency loans for multifamily projects.

Without significant demand for acquisition and development loans, it's no surprise that originations decreased in 2008 for most lenders and intermediaries. While the MBA doesn't break out dollars borrowed for new deals as opposed to refinancing or loan extensions, the anecdotal evidence suggests that renewals of existing mortgages make up the bulk of lending activity today, says Jamie Woodwell, vice president of commercial real estate research at the MBA.

At Bank of America, which ranks No. 1 on National Real Estate Investor's 2009 Top Lenders Survey, a brisk loan origination business masked a decline in loans to new borrowers.

The Charlotte, N.C.-based institution's direct lending volume swelled to $129.2 billion in 2008, up 41% from $91.5 billion in 2007, but loan extensions and refinancing activity made up the lion's share of those results.

“You see a big number there, but the fact of the matter is that new credit being extended in the real estate space is down considerably,” says Eugene Godbold, president of commercial real estate banking at Bank of America.