January ended on an ominous note for the nation’s commercial mortgage-backed securities (CMBS) market. For the first time in its 20-year history, not a single securitization issuance was priced in a one-month period, though the pipeline is full of some $37 billion of issues.

That is a far cry from the heady days of just a year ago, when the CMBS market was on a multi-year roll. According to Credit Suisse, dealers sold a record $233.7 billion of U.S. CMBS bonds last year, up 14% from 2006 volume. But starting in mid-2007, the combination of the prolonged subprime residential mortgage mess and a deep credit crunch spooked away most traditional CMBS investors.

At the same time, many lenders — including commercial banks — significantly trimmed their fixed-rate lending on commercial properties, choosing to focus on the more worrisome task of working out their subprime residential mortgage portfolios. Investment banks, too, are in full scramble mode. In January, Merrill Lynch was the first of the major Wall Street firms to specifically write down commercial mortgages, to the tune of $230 million. Most analysts predict much more pain is on the way.

Among the most closely watched bellwethers of the CMBS market’s short-term prospects is Blackstone Group’s proposed deal backed by its purchase of Hilton Hotels Corp., which closed in October 2007. The lead financiers of the original $20 billion deal to buy Hilton, including Bear Stearns, Bank of America, Deutsche Bank, Goldman Sachs and Morgan Stanley, are anxious to push through an $8.4 billion CMBS offering in the next six weeks. When priced, that issuance will likely set the record as the largest CMBS ever.

Investors have already snatched up some $3 billion of the riskiest bonds associated with the Hilton buyout’s floating-rate debt financing, and both Blackstone and Hilton are considered seasoned hotel owners and operators. But the deal is both unique and complicated in that Blackstone is the only borrower in the pool and about half of the collateral on the CMBS bonds is backed by Hilton franchise fees.

In the wake of last summer’s credit crunch and in anticipation of a prolonged CMBS slump, the three major rating agencies issued various reports late last year warning of increased subordination levels and stricter review standards for CMBS pools. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings continue to monitor underwriting trends and the performance of loans in CMBS pools.

Tad Philipp, managing director at New York-based Moody’s, predicts that CMBS volume will end the year at $100 million, but notes that the market is resilient. “It has successfully weathered several capital markets storms, including the one resulting from the Russian bond default in the fall of 1998,” says Philipp. “However, it is possible that the current liquidity turmoil may result in a longer disruption given that the capital markets have become progressively more leveraged and interconnected.”

For now, property fundamentals continue to maintain fairly steady footing, despite mounting economic challenges on the horizon. But in a recent report, Goldman Sachs analyst James Fotheringham predicts that U.S. commercial property values could fall up to 26% through 2009, with the resulting loan losses totaling $180 billion. Fotheringham also expects losses attributable to CMBS and collateralized debt obligations (CDOs) to reach $20 billion this year.

Further complicating CMBS growth is a rising cap rate environment. “Rising cap rates should result in less velocity in the property sales market, less defeasance, and less public-to-private conversions, all of which helped propel CMBS issuance volume to its recent highs,” says Philipp. “It is difficult for issuers at this point to comfortably price loans intended for securitization in an unsettled market.”