Surely all of the action seen last week was in the commercial mortgage-backed securities sector, where three deals (four, including the prior week's PNC pricing) priced amid some concerns about relative collateral comparisons (see story above).

With an average credit support of approximately 24%, there was about $2.47 billion CMBS absorbed over the last few weeks, and while each deal had its pluses and minuses, a stack of paper like that is a healthy meal for any spread sector.

"All of the triple-A's are distributed to the market, and if you add up all these deals, I'd say it's pretty impressive," said one CMBS trader.

According to another source, current deals are seeing less exposure to health-care and more exposure to general assets and less unanchored retail. The market is certainly well developed, and in a lot of ways, it is business as normal.

In the three recent deals this week, there was a very small unanchored retail component, whereas the PNC conduit that priced the week prior had approximately 14% unanchored retail.

Investors typically have a preference for less unanchored retail. But in many cases the unanchored retail is strong and diversified but has a small group of tenants, "whereas sometimes when you have a big anchor the loss of that anchor causes a big commotion," a CMBS source noted. "I think it shouldn't matter to investors either way."

"What you will see is a continual reduction in conduit originations compared to last year and the year before, because there is less real estate being financed," said the trader. "It's a smaller, cozier world than before. But in my view, I think the future of CMBS issuance for next year will be connected to interest rates."

At press time, the Chase and KeyBank deals were on the cusp of pricing, and officials at Salomon Smith Barney, a co-lead and co-bookrunner on the Key deal and the sole co-manager on the Chase deal, said that pricing for at least the KeyBank deal would wait till today, as salesmen were leaving early for the weekend.

CMBS Fundamentals Look Good

If interest rates stayed where they are, or went up a little bit, there might be more moderate production levels. Additionally, some of the 10-year loans with weaker call protection from the early 90s will fall due shortly, although they would be interest-rate sensitive. Ultimately, however, market players indicated that a lot depends on the robustness of the real estate economy going forward.

For instance, the velocity of transactions has slowed down quite a bit. Real estate investment trusts have not been as active lately, and on the equity side, there has been a slowdown in the velocity of transactions as well. In fact, not only are REITs selling assets, but they are buying more conservative assets. Moreover, companies like TrizecHahn are taking giant cash positions, and it is not immediately clear what they are anticipating to do with such positions.

Perhaps firms are buying properties in anticipation of the property carrying the mortgage, giving them a small return, suggested one source. But overall, CMBS fundamentals seem encouraging: vacancy rates are still very low as compared to the time preceding the last recession. Property returns, and indicator of what a property has to yield for an investor, are still north of where Treasurys are by around 300 to 400 basis points, according to Darrell Wheeler of Salomon Smith Barney.

"All of this has impacted the need for financings," another CMBS source said.

The three factors that drive originations: refinancings, rollovers from previous mortgages and the actual transaction volume, have all slowed down, sources say, which doesn't bode well for originations over the next several years.

"It's not just the conduits, but the regular portfolio lenders that are having a tough time," the source said. "There will be an interesting dynamic going on this fall, so investors are smart and are picking up on it, and so they are buying."

So with the increased issuance seen this past week, one would have thought that spreads would have widened, but instead, the held up pretty well.

"Two years ago, I would have thought that if all this hit the market at once, spreads would have widened, but it didn't happen," noted the trader.

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