CMBS market moving sideways

As one Wall Street market color sheet quipped, “You know the sector has been relatively quiet when there are more traders than securities being traded.” While that statement is a thinly veiled reference to the personnel turmoil that recently hit Credit Suisse First Boston, it's also an accurate portrayal of activity in the CMBS sector. The commercial mortgage market continues to be in a cautious mode as lenders are unsure of the economy's direction and, at best, sense that it is moving “sideways,” according to the Barron's/John B. Levy & Co. National Mortgage Survey.

Year-to-date, there has been only one plain-vanilla conduit offering, which has left buyers and sellers without a reliable trading benchmark. But all that is about to change. As of this writing on March 1, Wall Street sources claim that a whopping $18 billion will be coming to market in the next 60 days, more than half of that expected in March alone. The coming onslaught of new deals, along with a lack of clear direction in the market, is causing a number of major buyers to play a wait-and-see game. In a recent research piece, Banc of America Securities expert Michael Youngblood argued that a new accounting standard, Financial Accounting Standards Board (FASB) 140, which took effect April 1, was expected to further push originators to securitize their transactions in March. FASB 140 could cause new securitizations to be treated as financings and not as sales, the latter being more valuable to the originators.

At least two new deals were expected to price in the first week of March: a billion-dollar generic conduit offering from Credit Suisse First Boston, with additional collateral contributed by KeyBank, and a $500 million offering on 245 Park Avenue being brought to the market by Chase and Salomon Smith Barney. Although neither deal has created a true sense of excitement in the market, the Credit Suisse First Boston conduit offering clearly has been playing to a more welcoming audience. The $518 million class A-3, rated triple-A, was expected to price in the range of interest rate swaps plus 0.47%-0.49%, which would be a strong showing, according to industry analysts. Naysayers indicated that the price would have to rise to at least the interest rate swaps plus 0.50%-0.52% range in order to clear all the bonds. Some industry insiders noted that the tighter spreads are being made possible because Credit Suisse First Boston has already booked a $100 million plus order from Merrill Lynch Bank for the triple-A rated paper.

The Chase offering on 245 Park Avenue was not being received nearly as well. The $240 million class A-2, which was originally expected to price in the range of interest rate swaps plus 0.60%-0.62%, has already been widened to 0.65%, while the $40 million class E, rated Baa2, has widened from interest rate swaps plus 1.25% to swaps plus 1.30%. Insurance companies, which are the major buyers of these large, single-asset transactions, are full of large Manhattan office buildings and are also looking down the road to the impending purchase of Rockefeller Center and the World Trade Center, both of which will require extraordinarily large securitized mortgages later this year.

On the loan origination side, a sharp decline in Treasury yields has pushed most borrowers off the fence and into the market. A few institutional lenders have responded to lower Treasuries by sticking a floor on interest rates such that they are unwilling to lend at rates below 7%, regardless of how low Treasury yields go. These floors are generally temporary until lenders and borrowers can agree that Treasuries will stay at their current levels for a significant period of time.

The weakness in the economy has a number of CMBS buyers expecting mortgage default levels to at least double and are pricing those new higher levels into their pricing models. But not all CMBS buyers agree with this more conservative view. Angelo Manioudakis of Miller, Anderson & Sherrerd noted that the “price of risk has changed, thereby making CMBS attractive even in the event real estate doesn't perform well.”

Meanwhile, construction loans are in short supply these days. John Akridge, a Washington, D.C., area developer, noted that office building pre-leasing of at least 40%-50% is now needed. Up until recently, some banks were making construction loans without any pre-leasing requirements.

John B. Levy is president of John B. Levy & Co. Inc. (www.jblevyco.com) in Richmond, Va. © Dow Jones & Co. Inc., 2001.

Barron's/John B. Levy & Co. National Mortgage Survey