The much anticipated cadence of commercial mortgage deals has come to pass of late, with two already wrapped up in March and two more likely coming the week of March 18. The next conduit to price will be the Morgan Stanley conduit (MSDWC 2002-HQ). Guidance is out and is kind to the deal with the 9.36-year WAL tranch tagged in the 47 basis points area over the swaps curve and the 5.74-year WAL in the 43 basis points area.
The 10-year tranche is very much in-line with where recent deals have priced, but the 5s are a basis point through where the Bear Stearns TOP-6 issue came on March 8th. The Morgan Stanley issue consists of loans from MSDWC and John Hancock, and is heavily concentrated in retail (38.9%) and office (28.7%) property types.
The other issue in the market is a $1.26 billion Lehman Brothers-UBS Warburg conduit. That deal is in the midst of a road show and at the time of this writing, pre-sales were not available.
To the extent that March issues have been coming in at or near $1 billion is somewhat significant. There was rampant prognostication that volumes would be trimmed as they came to market, as investors tried to absorb the volume, but so far the pace has been manageable and has not lent itself to mitigating deal size. Moreover, lower dollar prices have surfaced with the sell-off in Treasuries, adding a positive spin to upcoming supply. Spreads have remained in a narrow range as a result of both forces, but there is growing evidence for near-term tightening.
Spread direction tends to be a forward-looking indicator in CMBS. That said, the hefty March calendar was well advertised back in February, leaving the reality of a weekly conduit pricing a non-event and spread volatility at a minimum. Looking ahead, suggestions that the economy is improving and that higher interest rates will put pressure on further supply only lends to the notion of tighter spreads.
relative value in CMBS
Despite the recent tightening in the A-rated sector, it continues to hold relative value versus corporates, says Greenwich Capital. It currently offers a 32 basis-point pick-up. While down from 53 basis points earlier this year, it is still attractive. To illustrate, back in September, the pickup was only 4 basis points.
While 10-year AAA CMBS are fair to slightly rich versus most competing sectors, Greenwich says that further backups in Treasury yields accompanied by a flatter curve are expected to exert widening pressure on swaps, while AAA CMBS hold steady or tighten further on its status as a "safe-haven."
Looking down the road, CMBS look to be attractive relative to pass-throughs. Currently, pass-throughs look cheap to CMBS, says Greenwich; however, the firm expects pass-throughs to cheapen throughout the year on the higher rates, flattening curve, and less attractive CMO arbitrage.