Now that the fourth quarter is upon the mortgage market, commercial mortgage-backed securities players are keenly tuned in to where spreads are heading, waiting vigilantly to see how the market will react to Y2K concerns.

"There are a lot of deals that people would like to do, but there is a cat and mouse game going on as to whether or not there is an investor base," said Joseph Franzetti, the head of Salomon Smith Barney's conduit operation. "People want to stay liquid, and so they may not be looking to buy, but some are looking to keep their powder dry, hoping they could clean somebody's clock. As soon as people see some investor interest in the market, they may throw their deal in."

Observers agree that there are going to be many CMBS deals teed up - but they won't necessarily get done.

As market participants see spreads widening during the fourth quarter, they may pull back; but then again, if spreads tighten, they may put their deal into the mix.

"This may suggest a very balanced spread scenario," Franzetti added. "But it is about as unpredictable as you can get."

"I still think there will be a good volume of CMBS closings in December, regardless of Y2K concerns," added Carol Houst, a director at Finova Realty Capital, an Irvine, Calif.-based financial services company. "There is definitely concern and caution, however, and people are trying to close things by November, for the most part."

Market Is Looking Good

Despite the expected investor pullback during the fourth quarter, there seems to be a more positive tone for CMBS product recently, and many participants are predicting that spreads will continue to tighten going forward.

This past week, the 10-year triple A CMBS was at 136 basis points over. The double-A priced at 159 over, the single-A at 180 over, the triple-B at 230 over, and the triple B- benchmark at 315 over.

"I think CMBS is going to follow spread product in general, although supply will be more moderate than it has been in the past," said one head CMBS trader at a major investment bank.

"It has been a tough market for spread product in general, but we've rallied in here clearly for the past few weeks," noted Patrick Corcoran, head of CMBS at J.P. Morgan.

The market seems to have shown itself to be highly sensitive to new issuance volume, and particularly sensitive to the perceived quality of the new issuance itself.

Lehman Brothers' current deal priced significantly wide to price talk, sources say, perhaps five basis points wider to where it was launched. Donaldson, Lufkin & Jenrette Securities' $900 million conduit is being priced approximately five basis points tight to Lehman's deal.

Finally, Bear, Stearns & Co.'s $346 million floating-rate Windham single-property deal was expected to take slightly longer to price.

The price talk for the triple-A class was said to be LIBOR plus 80, the double-A class, LIBOR plus 85, the single-A and double-B-plus at 150 over, the triple-B at 225 over, and the triple-B-minus, 275 over.

"Single-property deals typically appeal to investors who are also direct lenders and therefore take longer to do their homework then investors who are simply generic fixed-income investors, who defer to rating agencies," said one CMBS expert.

Back In the Saddle

One year after the market meltdown, it appears that CMBS have regained their momentum.

Several players agreed that the appetite for commercial mortgage-backed securities is definitely on the upswing, and while new participants are not necessarily entering the market, a few staunch and highly reliable players are maintaining the market.

"I think there is a good, healthy demand for CMBS," said Finova's Houst. "There is still the ability to get very aggressive on pricing. For example, yesterday, I turned around a non-anchored retail deal at 190 over the 10-year T-bill."

Still, Houst admitted that there still is an "air of caution" in the market, since borrowers want to be assured of timely delivery and ensured that their securities are not being retraded. "I also think banks have gotten more competitive. Their process is easier, and equivalent interest rates from insurance companies or banks are going to be at least a quarter to half a percent higher."

Additionally, sources noted that investors are tiering their perspectives on the market more and more, desiring certain names and players that have good sponsorship and underwriting.

"More investors have expanded the definition of branding, in terms of sponsorship, who made the loans, and whether or not they are going to stick by them," said Salomon's Franzetti. "All of these factors are more critical now than ever."

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