Commercial mortgage rates continued to drop during March, according to the Barron's/John B. Levy & Company National Mortgage Survey. Spreads -- the difference between mortgages and Treasuries of the same maturity -- were relatively stable, while Treasuries continued to decline. The Barron's/Levy Prime Mortgage Rate for a 10-year loan that runs 70% to 75% of the property's value is now 8 5/8% vs. 9 1/8% just 60 days ago.

Loan demand has strengthened considerably during the last 30 days as borrowers sought to take advantage of the rate drop. Despite the fact that some of the available credit has now been sopped up, there is surely no indication of a shortage of investable funds at any time in the near future. Institutions seem dead set on expanding their slice of the commercial mortgage pie and are allocating more dollars to the industry, even though there is relatively little new product being built.

Pension funds and insurers are finding that this time around they are getting plenty of competition from commercial banks. Banks, too, are flush with investable funds and are turning over rocks to find new investments. Some of the most active players today include Wells Fargo, Bank of America, Wachovia and Chemical Bank. In the past, banks tended to stick to relatively short-term loans, but that's all changed. It's not at all unusual to find commercial banks willing to extend credit for up to 10 years on transactions that they find particularly compelling. To be sure, the life insurers and pension funds are aghast since longer term business is an arena they have previously had all to themselves.

Part of the increase in loan demand today is coming from the real estate investment trust industry. Many REITs are finding the equity capital markets too costly and are turning to debt as an alternative. Several survey members mentioned that they are discussing loans to REITs which will be in the range of 70% to 75% of the property's value. In the recent past, REITs have tended to seek lower leverage loans but are leveraging up today in an effort to find a new source of funds.

At the height of the so-called commercial real estate credit crunch, commercial mortgage conduits were the rage. Many analysts thought that they were the funding vehicle of the future and would enable developers to sell their loans to investment banks, who would in turn package the loans in a security and sell the securities to the public and other institutional investors.

While the supply of conduits has sprung up like wildfire, more than 40 at last count, loan demand has dried up. Insurers have returned to the commercial mortgage market more quickly than most conduit originators would have projected. To make matters worse for conduit originators, insurance spreads are much tighter.

For example, conduit spreads normally began at 2% and may well go above 3 1/2%, depending on the type of property and degree of leverage required. Insurers, on the other hand, are now offering spreads at well below 1.75% for the majority of their transactions. Because of the huge spread difference, conduits tels, mini-warehouses and unanchored shopping centers are just a few of the "niches" conduits are seeking to fill.

The word on the street is that a number of conduit programs may soon close up shop unless volume increases rather rapidly. The name most frequently bantered around is the operation run by Salomon Brothers. Nomura Securities International, in an attempt to increase loan volume, has agreed to accept loans directly from borrowers as opposed to accepting them only through its exclusive correspondent network. Bear Steams has also taken this approach, in another sign that conduit loan volume has run way below expectation.