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The Good Times Roll On

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.

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