Due to factors such as low interest rates and significant available capital CMBS issuance is expected to remain robust for the remainder of the year with volume thus far exceeding last year's by 65%.
"We expect issuance will continue at its torrid pace for the rest of the year and that domestic CMBS issuance will total $145 [billion] to $150 billion by year end," JPMorgan Securities analysts reported, attributing the record $72 billion first-half domestic issuance to low interest rates, strong historical returns and the lackluster equity market.
This year's issuance surge was driven by fixed-rate conduit deals, which comprised 80% of domestic volume thus far. Although fixed-rate conduit issuance typically slows during the third-quarter, current origination patterns seem to indicate that volume will remain robust for the rest of 2005. JPMorgan stated that with 10-year Treasury yields still hovering around 4% "fixed rate issuance has been in record-breaking territory each of the last several quarters." Therefore, analysts project third and fourth quarter volumes to remain at $25 billion to $30 billion. In fact, if 1995 to 1996 vintage loan refinancing were factored in, 2005 fixed-rate conduit issuance could reach roughly $115 billion, analysts added.
JPMorgan is far less optimistic about floating-rate issuance, expecting merely $5 billion for the second half and $12 billion for the entire year. The flatter yield curve and more flexible fixed-rate alternatives currently being offered, among other things, are slowing the sector down, said analysts.
In terms of single asset or single borrower volume, JPMorgan analysts said that issuance in this sector is quite lumpy. For instance, the robust 2Q05 issuance was due mainly to two single-asset deals - the $1.7 billion GSMS 2005-ROCK transaction and the $1.9 billion CCT 2005-1 deal. They also noted that these deals usually average $300 million to $500 million, widening the range of potential year-end volume between $1.2 billion to $7 billion. But with the uncertainty surrounding the Terrorism Risk Insurance Act's renewal, floating rate issuance should decrease. JPMorgan analysts predict second-half issuance to reach $3 billion, with full-year numbers totaling $8 billion.
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