Issuance of commercial mortgage-backed securities for the first half of 2008 totaled just over $12 billion, a level last seen in the first half of 1996, Moody’s Investors Service reports. The first half issuance is also 91% less than the issuance of about $137 billion for the first half of 2007.

Not only is issuance of the securities down, the pipeline is also dry considering that conduits have to compete with portfolio lenders who are offering borrowers interest rates that are 1.5% below the rate necessary for conduit lenders to break even on deals.

Even then, nobody expects the CMBS vehicle to remain dormant forever. “Most market participants, including Moody’s, believe that the industry will survive, but in a simpler, scaled-down form. It will be a very long time, if ever, before the industry sees issuance volume in excess of $200 billion again,” the credit rating agency says.

So when will the market pick up again? There could be a modest uptick in the second half of 2008 after portfolio lenders use up the money they have allocated to commercial real estate for the year.

For a more sustained revival however, investors will need to feel comfortable with commercial real estate prices and be convinced that the worst is over for the sector.

Until the negative sentiment in the credit markets runs its course and a true bottom is discerned, investors will continue to remain on the sidelines. Considering that commercial real estate reacts to economic conditions and is a lagging indicator, it could take another year or two for investors to jump back into the game.