Brian Lancaster co-authored this article.

Commercial mortgage-backed securities issuance could reach $60 billion this year and rise another 10% in the first half of 2003 as borrowers continue to lock in record-low interest rates and bid-offer spreads narrow. CMBS now accounts for about 20% of commercial real estate financing and, despite deteriorating real estate conditions, should remain a relatively safe haven for investors in the coming months, according to the latest Wachovia Securities industry outlook.

Although deterioration in the commercial real estate sector could push CMBS delinquencies to 2.5% from the current 1.8%, CMBS defaults should be cushioned by low cap and interest rates, conservative underwriting, prior rent run-ups and positive equity positions among borrowers. That's in keeping with CMBS' historically strong track record. According to data from Intex Solutions, of the approximately 70,000 CMBS loans originated to date worth slightly more than $400 billion, there have been only 243 losses worth six basis points of the combined original balances passed on to bondholders.

Overall, the commercial real estate market will continue to deteriorate through the end of the year and into 2003, but at a moderating pace. Anemic demand growth and substantial overhang from business contraction have been offset somewhat by the lower interest and cap rates, robust capital inflows, high risk premiums and waning supply growth.