It was the best of times; the worst of times never showed up in 2002, according to the Barron's/John B. Levy & Co. National Mortgage Survey. Interest rates were at their lowest level in 40 years, issuance of commercial mortgage-backed securities (CMBS) was surprisingly strong and loan delinquencies were in the comfort zone. Investment-grade CMBS was the best-performing sector of the Lehman Brothers Aggregate Bond Index, with a total return of 15.45% for the year. Treasury returns were a whopping 2.18 percentage points lower.
While the CMBS market was reasonably quiet during the holidays, the first quarter will not be sleepy. A quick look at the calendar shows 14 transactions were scheduled to come to market by early this month. Some observers project an issuance volume as high as $22 billion in the first quarter vs. less than $14.7 billion last year when volume was still affected by 9/11.
Last June, we assembled a group of CMBS buyers and sellers to give us their estimates for CMBS triple-A spreads and issuance volume at year end. On the spread side, the group was overly optimistic, predicting 10-year triple-A spreads to interest-rate swaps would end the year at 42 basis points, compared with the actual year-end figure of 47 basis points.
Meanwhile, the gang was downright timid on the volume side. Global first-half CMBS issuance had been only $34 billion, and the panel estimated second-half volume would equal that, for a year-end total of $68 billion. However, the sharp decline in rates in late summer and early fall brought tons of transactions. Result: The 2002 total was a sizzling $91 billion. Paul Fitzsimmons, vice president of CMBS research at Credit Suisse First Boston, was a double winner, forecasting that triple-A spreads would be at 48 basis points and volume would hit $85 billion.
In January, we brought together a new panel and asked for its forecast through June 30, as shown in the table below. With an expected volume of $46 billion in the first half of the year, the panel seemingly is calling for a new issuance record, perhaps as high as $105 billion. On the spread side, the group remains optimistic, although some members forecast a modest widening.
Loan delinquencies remain remarkably modest. According to data gathered by CMBS analytics firm Trepp LLC, delinquencies for fixed-rate conduit loans at year's end were 1.66%, nearly unchanged from the June 30, 2002, level and up only a tad from 1.49% on Jan. 1, 2002.
Interestingly, the lowest delinquencies were in the office sector, which recorded a 0.59% delinquency rate, down from 0.69% at mid year. Office delinquencies tend to lag behind other property types, especially multifamily, due to the long-term nature of office leases.
Multifamily garnered the second-lowest delinquencies at 1.02%. But fundamentals are soft, and in many markets, especially the office sector, vacancies are still rising while rental rates decline.
John B. Levy is president of John B. Levy & Co. Inc. in Richmond, Va. © Dow Jones & Co. Inc., 2003.
A panel of experts provided its forecast for CMBS volume and spreads through June 30, 2003. The panel predicts a big increase over the $34 billion issued in the first six months of 2002.
| Name | Company | Triple A Spreads to 10-Yr Interest-Rate Swaps* | Global CMBS Issuance Volume (billions) |
|---|---|---|---|
| Larry Brown | Deutsche Bank | 44 | 49 |
| Ken Cohen | Lehman Brothers | 48 | 55 |
| Larry Duggins | Arcap REIT Inc. | 50 | 40 |
| Mark Finerman | Greenwich Capital Markets | 48 | 49 |
| Barry Gersten | GMAC Commercial Mortgage | 49 | 40 |
| Eric Gould | GE Asset Management | 49 | 45 |
| Jim Higgins | Bear Stearns | 38 | 50 |
| Peter Horos | Allstate Insurance Co. | 45 | 38 |
| Dan Ivascyn | PIMCO | 44 | 45 |
| Mike Marriott | Credit Suisse First Boston | 42 | 43 |
| Andrew Parower | New York Life Investment Management | 49 | 45 |
| Mitch Resnick | Goldman Sachs | 43 | 50 |
| AVERAGE | 46 | $46 | |
| *in basis points, or hundredths of a percentage point | Source: John B. Levy & Co. | ||