With more than $3 billion of commercial mortgage-backed securities paper fully absorbed by the market over the last two weeks, and four deals neatly circled and priced, it is safe to say that CMBS currently appears robust.
But with remarkably similar-looking collateral for the latest spurt in issuance - and a handful of issuers who are trying to establish names for themselves during a time of low origination - observers predict that CMBS pools will become smaller as firms work separately and as investors increasingly pick and choose from identical-looking deals.
"It would have been nice to see some of these deals combined for more liquidity," said a CMBS researcher from a major Street firm. "But people are trying to establish names or labels, and as origination goes down we may see the pools become smaller."
"There were four deals in a row here that almost looked like identical twins," said another market player. "If combined, each of the loans would have had less individual exposure."
Indeed, the four CMBS transactions that hit the tape over the last two weeks - a $802 million issue, PNC-CMAC 2000-C1, a $886 million deal from DLJ, DLJ CMC 2000-CF1, the Chase Commercial Mortgage Securities 2000-2 for $738 million, and the Pru/SSB/McDonald Investment KeyBank Commercial Mortgage Trust 2000-C1 deal, for $818 million - all contained pools that were very similar, making it tough for investors to distinguish between them.
"The noteworthy thing about them is that there was nothing noteworthy about them," said Darrell Wheeler, a CMBS researcher at Salomon Smith Barney. "But they priced very nicely, demonstrating the strength in the market."
Still, had these deals - which averaged around $800 million - been combined into one conduit worth $1.5 billion, there would be more liquidity in them, and the subordination levels would have been a percent lower.
"This would have given it better diversity," a source said.
In some of the pools for these deals, a few of the loans were more than 5% of the pool; but if the deals were combined in some way, those loans would comprise less than 2.5% of the pool.
"The KeyBank deal has no loan greater than 3.7% of the pool, which is great, but it would be even more fabulous if it had no loan greater than 2% of the pool," Wheeler said.
Still, it is clear that the market is deep, sources say, and the two well diversified loans and one "lumpy" pool represented in the deals were absorbed very easily by the market. On the PNC deal, the ten largest loans comprised 23% of the deal, on the KeyBank deal the ten largest comprised 24%, for Chase, 41%, and for DLJ, 43%.
"I think it is very difficult, with this many parties involved, to combine deals," an observer said. "Eventually the market might go back to that, but for right now the deals are going to stay in the $700 million to $800 million size."
And there still seems to be great investor appetite for deals of this size. But because many of the deals last week had similar types of collateral, investors seemed to be buying a little bit of each one.
"Investors said, I'll take a bit of that one and a little bit of that one'," said one source knowledgeable about the deals. "Investors are used to being able to distinguish between deals, and looked for elements in these deals that were different, but there really weren't that many."
Indeed, besides the fact that the Chase deal had a slightly higher degree of "lumpiness" in its loan pool according to Moody's Investors Service, each of the deals had very similar advantages: the stress debt service coverage was in the range of 1.16 to 1.18, and the property composition did not contain many credit tenant lease loans and had only minor exposure to limited-service hotels.
This homogeneity in the CMBS pools of the last four deals raised some eyebrows. Many market participants asked themselves, "Are these similarities a function of the underwriters learning, or a function of the B-piece buyers kicking out loans?"
"I think the fundamentals are very strong for CMBS, and underwriters have learned what good loans are," said one CMBS head who offered an answer to the query. "We're seeing some decent quality deals - I'm not saying they're the highest quality - and that is reflected by subordination levels.
"There may be little profitability on the execution but in terms of what investors are getting, they're decent deals."