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
|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|
|*In basis points, or hundreds of a percentage point.|