Net Lease forum

NLf: What's your latest reading of debt conditions now that we've started the fourth quarter?

Murphy: It's going to take a while for the CMBS markets to settle in. The good news is that rationality has returned to the underwriting process. We were really getting close to being out of control in terms of the dollars we were offering and the terms that were out there, especially given the interest rate cycle. All of this is good, even though it's temporary pain. Interestingly, the middle tranches in the CMBS pools aren't selling. The A-rated tranches and the unrated tranches are selling very well, but those just-below-investment-grade are sitting. There doesn't seem to be any buyers for them. Some of the life companies have actually stepped in--Principal and Mass Mutual via Babson and John Hancock have actually come in and started buying their own tranches in some of these securitizations. They think there's value in the yield that's out there today.

Having said that, at one point the overhang in the market was somewhere north of $60 billion. So it's going to take some time to run off. I've heard numbers lately that say that's down to as low as $20 billion, but, of course, spreads have widened dramatically. Break-even now on a securitization, I'm being told by most of my friends on the street, is somewhere close to 200 basis points over the curve. Things will settle in. This happened in '98 and then it happened again to a lesser extent in the spring of '99. It just takes time.