Commercial mortgage-backed securities continued to pick up steam in Canada last year, with volume hitting $3.3 billion, an increase of close to 32% over the $2.5 billion that came to market in 2002.

Moody's Investor Services Vice President and Senior Analyst Charles Gamm expects volume to grow steadily this year. Just shy of five years old, the market has not yet weathered a real estate cycle, but it has been a well-performing asset to date, and investors appear willing to continue buying the bonds, he said.

"I think volume could easily exceed $4 billion this year," Gamm said.

One of the more significant developments in Canada has been the growth in the size of deals. In 2003, transactions averaged $412 million, compared with $270 million the prior year.

"The last few deals in 2003 were all in excess of $400 million, which was almost unheard of in previous years," he said. "Investor appetite is growing, and it is becoming easier for them to swallow relatively large deals."

However, the market is still hindered by limited interest in the B pieces as many investors still balk at taking on the riskier assets, despite their stellar performance thus far.

"There have been no losses on any Canadian CMBS to date," Gamm said. "The delinquency rate is much lower than it is in the U.S., and so the B piece buyer probably makes the same spread as in the U.S., but has no losses to cover," Gamm said.

The delinquency rate in Canada is a mere 0.1% as opposed to 1.8% in the U.S., he said.

Also in 2003, Canada saw its debut single-asset deals, the first in the second quarter backed by the West Edmonton Mall, and another in the fourth quarter backed by Bankers Hall, Gamm said.

"The predominant issuances in Canada were conduit CMBS bonds, but both of these deals were very successful in terms of investor acceptance," he said.

The market is still confined to four active issuers, but there soon might be additional players, Gamm said. The Royal Bank of Canada has been staffing its securitization team, he noted, which could be a sign that they intend to enter the CMBS arena in the coming year. -SM

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