The bullish outlook is bolstered by activity elsewhere in the CMBS market. The second private-label issue of the year, a single-borrower offering, priced in line with guidance on Wednesday; at 110 BP over swaps, it has a meager 2.2% yield. The $625 million of 4.9-year bonds, all-in-one triple-A tranche, were backed by a loan from Deutsche Bank to New York developer Sheldon Solow on a trophy office building at Nine West 57th Street in Midtown Manhattan. When those bonds hit the secondary market the next day, spreads tightened another 5 BP.

On the secondary market, a CMBS rally that took hold late last year has lost some of its steam over the past two weeks or so, but spreads remain notably tighter than they were a month ago. Ten-year notes with 30% subordination from the Goldman-Citi deal (GS Mortgage Securities Trust, 2012-GC6), which priced with a 120-BP spread at issuance, were trading at 110 BP this week. So were comparable super-seniors from other multi-borrower deals that had been trading with 125-BP spreads at yearend.

Junior triple-A bonds from recent issues, with subordination of 19.1%-22.1%, were changing hands at 230-235 BP this week — down 25 BP from a month ago and 45 BP from yearend. Double-A spreads have contracted to 315-320 BP, down 40 BP since mid-January and 80 BP for the year.

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On Friday, September 16, JP Morgan priced a $1-billion offering at similar spreads. The 9.7-year super-senior CMBS priced at 185 bp over swaps, similar to the Morgan Stanley offering. However, the shorter classes priced tighter, with the 2.6-year class A-1 pricing at 100 bp over swaps and the 4.8-year class A-2 pricing at 175 bp over swaps, compared with 115 bp over swaps and 185 bp over swaps for the corresponding classes of the Morgan Stanley offering.

Finally, on Thursday, September 22, Goldman Sachs and Citigroup priced a commercial CMBS offering that had been delayed for two months after S&P pulled its ratings (see our 7.28.11 article “S&P Suspends Ratings on New Issue CMBS 2.0 Deals” for details). The 9.6-year super-senior CMBS priced at 170 bps over swaps, 15 bps tighter than the Morgan Stanley and JP Morgan issues. The shortest class also priced tighter than the JP Morgan offering, with the 2.3-year class A-1 placed at 90 bp over swaps, 5 bp tighter than the JP Morgan offering. And Goldman and Citi evidently placed all of the subordinate investment-grade bonds, unlike the issuers of the two previous deals.

“The stabilization and tightening of spreads is a welcome relief for CMBS origination shops,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We have yet to see these results flow to new CMBS loan quotes, but if commercial CMBS pricing can grind tighter, I think borrowers will see some spread reduction in the near future, reducing loan rates from the current 6% area to more competitive levels.”

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According to Brian Hanson, managing director at the Bethesda, MD, office of CWCapital, at the recent Mortgage Bankers Association’s Commercial/Multifamily Servicing and Technology Conference, under Dodd-Frank, an operating adviser, or a trust or senior adviser would have surveillance of special servicer activities and could affect a B-piece buyer’s decision to add capital into a deal.

“There[in] lies the rub because if the B-piece buyer takes on risk, the operating adviser gives an annual review of the special servicer,” Hanson said. “If the B-piece buyer invests money and is not eliminated as a special servicer, and the operating adviser said the special servicer is not adhering to the deal or trust, [the operating adviser] can recommend [special servicer] removal, which is also not appetizing. Organizations want to clarify the language, and how that plays out will determine whether B-piece or special servicing holders will be in the market.”

“The master servicer may also have to consult with an operating adviser; after a control event occurs, the special servicer would consult with them on resolutions. If the operating adviser believes the special servicer should be replaced, they would receive a vote from bondholders,” said Greg Winchester, managing director at TriMont Real Estate Advisors Inc., Atlanta, GA.

However, whether operating advisers are special servicers or another industry group plays that role is still vague. Winchester said a special servicer would play the best role of operating advisor because special servicers have skilled staff and real estate experts in place with “a quick and speedy” approach, and they understand Pooling and Servicing Agreements. “This is what drives the market to the large extent and capital from the B-piece market is key,” Winchester said.

Since the CMBS market revamped last year, now CMBS 2.0, underwriting started out conservatively, which has some industry participants concerned. Hanson said first loans made after a recession are typically solid loans, and compared to aggressively underwritten vintage loans from 2006 to 2008, “it would hard to not be better as a group. If you look at any special servicers, the defaults are primarily seen on those vintage deals,” he said.

However, Hanson said weighed against more conservative underwriting and past experience are nearly 23 to 25 new conduit lenders. “There is a lot of competition for loans and, with that, comes risk and the possibility of more aggressive underwriting,” he said.

After losing a recent bid on a pool, Hanson said that as a B-piece buyer, CWCapital would have wanted some of the loans taken out of that pool — under an “unwritten rule” that it could negotiate with an issuer. He said the weak loans were a reflection of some markets still in trouble and problems with loan sponsorship. “We are definitely aware that there is a new crop of B-piece buyers,” Hanson said. “Who is in the market and how long they are in will depend on many things, including risk retention.”

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In February, the delinquency rate for U.S. commercial real estate loans in CMBS edged up 5 basis points (bp), putting the rate at 9.39%. That is once again the highest percentage of loans 30-plus days delinquent, in foreclosure or REO in the history of the CMBS market. This 5 bp increase, however, is arguably the smallest increase since we started publishing numbers 18 months ago.

A dip in the delinquency rate occurred in October 2010 when the huge Extended Stay Hotel (ESH) loan was liquidated at a loss. If the ESH loan is removed from the equation, February’s 5 bp jump is the smallest in almost two years.

The rate of increase has averaged 23.8 bp per month over the previous 12 months (after backing out the Stuyvesant Town impact in March and the ESH impact in October). The percentage of loans seriously delinquent (60-plus days delinquent, in foreclosure, REO or non-performing balloons) is now 8.75%, up 16 bp. If defeased loans were taken out of the equation, the overall delinquency rate would be 9.90%, up 4 bp from January 2011. One year ago, the overall U.S. delinquency rate was 6.72%, while six months ago, the overall U.S. delinquency rate was 8.90%. One year ago, the rate of U.S. loans seriously delinquent was 5.97%, while six months ago, the rate of U.S. loans seriously delinquent was 8.14%.

(1) Loans that are past their maturity date but still current on interest are considered current.

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