SIX MONTHS AGO, THE BARRON'S/JOHN B. LEVY & Co. National Mortgage Survey assembled a group of industry experts to forecast volumes and rates forcommercial mortgage-backed securities. The group's estimate of $75 billion in CMBS volume for 2001 fell far shy of the $93 billion in global volume for the year. On the spread side, the gang wore rose-colored glasses in estimating a triple-A spread to interest-rate swaps of 45 basis points, or 0.45 of a percentage point. The actual spread turned out to be 53 basis points. Bob Tsien, chief credit officer at Freddie Mac, landed closest to the pin for both spread and volume. We've invited a new group and asked for their forecasts as of June 30 (see table). The group expects global volume to be some $38 billion, vs. $40 billion in the same period last year. Both buyers and sellers expect spreads to tighten.

The $93 billion in global volume in 2001 was a record, shattering the previous record of $78 billion set in 1998. U.S. volume, at $70 billion, fell shy of a record, although it was the industry's second-strongest showing behind 1998. International volume doubled from approximately $11 billion in 2000, with much of the gain coming in the fourth quarter.

Signs of the times

Delinquencies are rising. According to Salomon Smith Barney, CMBS delinquencies, which were 0.78% at the beginning of 2001, climbed to 1.39% by year-end. Most of the increase occurred in the fourth quarter. Hotel delinquencies, which were running 2.03% on September 30, skyrocketed to 4.88% at year-end, and could jump to 8% before the bad news is over. Retail and multifamily delinquencies, although more modest, were also up smartly.

In a new report, Moody's Investors Service notes that community shopping centers are now “succumbing to the slowing economy.” And in what may be an omen, one major grocery chain, Winn-Dixie Stores Inc., has begun to play hardball with its landlords. We have learned that the company has stopped rent payments on some 50 locations covered by current leases, but the stores are “dark” — an industry term for closed or unused properties. Winn-Dixie has asked landlords to negotiate buyouts of remaining lease terms. Landlords who won't agree to buyouts are not receiving further rent. The company, rated double-B plus by Standard & Poor's, has declined repeated requests for comment.

The year ended with no government intervention in the field of terrorism insurance, but most industry analysts expect Washington to come up with a plan early this year. The lack of such insurance has affected the market's ability to originate loans on large buildings, but small and mid-sized buildings seem unaffected. Taking a contrarian tack, Brian Harris, executive director at UBS, declares that the “concern about terrorism insurance in large buildings is overrated.”

John B. Levy is president of John B. Levy & Co. Inc. (www.jblevyco.com), Richmond, Va., © Dow Jones & Co. Inc.
© Dow Jones & Co. Inc.

The Spreads Ahead

CMBS market forecasts for June 30, 2002*
Triple A Spreads to 10-Yr Interest Rate Swaps CMBS Issuance Volume (billions)
Dave Bagnani, Fidelity 45 35
Rob Brennan, CS First Boston 45 38
Ken Cohen, Lehman Brothers 52 48
Steve Finkelstein, UBS Warburg 43 37
Mike Higgins, CIBC 45 42
Steve Lynch, J.P. Morgan Fleming 46 36
Julie Madnick, Hyperion 50 35
Chris McCormack, Greenwich Capital Markets 46 35
Mike Patterson, Freddie Mac 44 38
Mitch Resnick, Goldman Sachs 45 37
Steve Switzky, BlackRock 48 32
Darrell Wheeler, Salomon Smith Barney 49 38
Michael Youngblood, Banc of America Securities 42 40
AVERAGE 46 $38
*In basis points, or hundreds of a percentage point.