A roaring Treasury market lit a fire under real estate borrowers as mortgage rates continued to set new lows for the year. According to the Barron's/John B. Levy & Co. National Mortgage Survey of more than 30 participants in the whole-loan and commercial mortgage-backed securities market, borrowers seemed anxious to take advantage of rates in the 7.5% to 7.75% range and were especially interested in year-end closings.

Institutional lenders quickly noted that their pipeline of pending deals - modest for most of the fall - was filling up. But even though fixed rates were inexpensive, more than a few surveyed stated that some 30% of their volume was still coming from floating-rate loans. Spreads for these transactions were generally 1.50% to 1.85% over LIBOR.

Analysts had predicted end-of-the-year sluggishness for new CMBS securitizations. But the calendar of transactions proved them wrong with at least six major offerings near the end of 2000. First up was a $1.3 billion offering from GMAC Commercial Mortgage, led by underwriters Goldman Sachs and Deutsche Bank. Price guidance on the $855 million Class A-2 was posted at interest-rate swaps plus 0.41% to 0.43%, somewhat wider than most previous deals that have been trading in the interest-rate swaps plus 0.39% to 0.40% area. At the Class-E level, rated triple-B, price guidance was in the area of Treasuries plus 2.46%, fully 0.10% wider than previous deals. Some market observers credited the widening as being in sympathy with the thrashing corporate bonds have been taking. Others suggested that the wider spread was needed to sell the bonds amid a flurry of year-end deals.

A significantly different $861 million offering from Banc One also was in the market. The collateral pool was unique in that it consisted of more than 1,100 loans, with an average loan balance of a paltry $775,000. These seasoned loans were generally originated by Banc One or its predecessors and, on average, had been seasoned for more than 3 1/2 years. Additionally, more than 41% of the pool consisted of multifamily loans that generally lure a number of investors, including Freddie Mac. Sources close to Freddie Mac indicated that they had a "strong interest" in both the GMAC and Banc One deal. However, it was not clear that they would participate in either deal, as their appetite for further transactions this year was quite limited.

CMBS spreads continue to perform admirably compared with corporate bond spreads, which have been widening on a daily basis. In fact, CMBS spreads have been so stable that as HypoVereinsbank's Brad Davidoff puts it, "It's a little like watching paint dry, which is a good thing."

Despite the current stability in the CMBS sector, a few money managers had contrarian thoughts. "With investment-grade corporates at their widest levels in 10 years, we see better long-term value in corporates," says Ron Mass of Western Asset Management.

According to the rating agency Fitch, there is good reason for the stability in CMBS. In a recent study, Fitch compared CMBS securitizations totaling $232 billion with corporate bonds over the 10-year period from 1990 to 1999. Research found that the average annual default rate on non-investment-grade rated corporate bonds was 3.07% as compared with a non-investment-grade CMBS average annual default rate of 0.14% for the exact same period.

Interestingly, the average annual default rate on non-investment-grade CMBS was equal to the lowest average annual default rate for an industry sector, which was for the cable industry. Fitch's research credits diversification for the extraordinarily low default rate. According to the report, "most transactions are backed by multiple assets, multiple borrowing entities and multiple tenants." Not surprisingly, Fitch expected some correlation between defaults in industries that affect commercial real estate and the defaults in CMBS. But, although some of the highest default rates were in fact in retail, supermarkets and drugstores, there appeared to have been no impact from these defaults on CMBS.

On the investment-grade side, the Fitch study also found that CMBS performed well, although by nowhere near as great a difference. The annual average default rate for investment-grade corporate bonds for the same time period was 0.08% as compared with 0.06% for CMBS.