The CMBS market is gearing up for the heaviest issuance month on record, with February production now seen surpassing the previous monthly record from December 2006 and approaching almost $40 billion in fixed rate issuance. First quarter totals are expected to exceed $50 billion and yet January has produced only the one deal totaling $1.55 billion. The Morgan Stanley Capital 07-TOP25 deal ($1.55 billion) that priced last week gave a glimpse into further tightening on the longer triple-Bs and triple-A super senior classes.
For example, the triple-A 10-year benchmark class priced at 22 basis points over swaps, 2.5 basis points better than the last conduit deal to price in mid-December. The sponsorship remains strong and that loyalty will get a stern test next month. Moves inside of 20 basis points over swaps are being watched closely as heavy supply and opportunistic fast money selling at the tight end of ranges present formidable barriers.
The secondary market accounted for most of the flow in the past week as some balance sheet room was cleared by accounts awaiting new issue and also booking profits on older deals in return for par priced paper soon to surface. Also, it proved an opportune time to test the voraciousness of the market's bid for CMBS, pre deluge.
Private label fixed-rate CMBS
With only one more conduit fixed rate deal left to price this month, spreads are primed to come in further until supply pushes them wider and lets the "pipeline yawn" commence next month. Most of the deals have been slated or pushed back to February and deal size is ready to expand rapidly. There are four deals anticipated to come to market at $6 billion or greater. The average fixed rate CMBS deal last year was slightly over $2.5 billion, according to Thomson Financial database, and higher commercial real estate prices point toward an increase again this year. Certainly, the bar is being set higher in the first few months alone. The increase in liquidity overall, either through the larger cash tranches or CMBX markets has added to the growing investor and account base that CMBS has seen over the past several years.
Market participants are currently concerned about underwriting standards and prepayment lockouts, with loan underwriters currently in heavy competition as a result of all the cash hitting the CRE market. Buyers are being advised to undertake a more proactive due diligence, even in regard to intermediate lock-out triple-As, as stress tests have divulged a wide array of scenarios on what was thought to be a flawless sector. A few years back, the introduction of shorter loans compromised the market somewhat. That problem is again surfacing with regards to longer loans that have prepayment flexibility.
Floating rate saw no new deals last week and only the Morgan Stanley floating rate shelf is due to price this month. The lack of discovery on levels has left the market wholly unchanged as a result. Spreads have come in substantially year over year and further upside is limited as a result.
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