In mid-January, the AAA spread was down to 975 basis points — still a nosebleed level compared with the 83 basis points for the same bonds at the beginning of 2008. Based on those average rates, the price of a bond purchased a year ago offered the buyer a 5.9% annual return.

To sell the same bond today, the seller would have to cut the price in half in order to give the buyer the 12.45% return dictated by current spreads. “A lot of the sellers won't be willing to part with their bonds at the pricing the market seems to be indicating,” Woodwell says.

Pricing has pulled potential buyers out of the market as well as sellers. Due to mark-to-market accounting, plummeting CMBS prices have withered portfolio values and soured investors' taste for the securities, says KeyBank's Sublett. “Institutions and groups that have bought bonds over the last two years have been so badly burned by the deterioration in their value that they have no appetite to buy new issuance.”

What's more, analysts say spreads overstate the likelihood of investor losses. Super senior CMBS bonds offer 30% credit enhancement, notes Murray of UBS Securities. That means those CMBS deals would have to suffer cumulative losses in excess of 30% from loan failures before AAA bondholders lose principal. Even if CMBS losses reach a more feasible 7% to 8%, which is two to three times the historical average, bonds as junior as AA would emerge unscathed.

“Right now everything is priced to a complete and utter meltdown,” Murray says. “Commercial real estate fundamentals are in for a rough time, but at no other time in my career have there been such investment opportunities in CMBS as there are now.”

CMBS loans are beginning to falter, and at an accelerating pace. The CMBS delinquency rate climbed to 0.88% in December and is projected to reach 2% by the end of 2009, according to Fitch Ratings. That is sure to fuel investor anxiety that has already paralyzed the market.

Even with December's increase in delinquency, more than 99% of CMBS loans remain current on payments. Unfortunately, current performance isn't the problem. “It's the concern of an impending increase in defaults and losses that creates this fear that overhangs the market right now,” Sublett says.

Commercial real estate fundamentals are weakening and will be affected by the depth and length of the recession, according to Edward Padilla, CEO of Bloomington, Minn.-based financial intermediary NorthMarq Capital. For now, it's too early to say how much cash flows and property values will suffer from the decreasing demand for space, or how many CMBS borrowers will default on their mortgages as a result.

That uncertainty makes investors unlikely to buy bonds, which they believe could still lose value before fundamentals improve. “We'll see a deteriorating commercial real estate market over the next year,” Padilla says. “That will make it increasingly difficult to float new CMBS.”

Investor fears of losses due to poor credit quality in CMBS pools have been heightened by a handful of massive conduit loans that recently moved into special servicing to avoid default. The first, a $225 million loan backed by the Riverton apartment complex in Harlem, N.Y., set off a downward spiral in investor sentiment and widening spreads when the borrower failed to come up with a September loan payment. Originated in 2007 using rent growth projections that didn't materialize, the loan stoked fears that a wave of defaults related to weak underwriting was beginning among CMBS loans.