The commercial mortgage-backed securities market passed a major milestone this week when First Union Capital Markets and Lehman Brothers successfully completed a $2.25 billion issue-the largest ever.

The deal shattered the previous record of $1.7 billion, set in September by General Motors Acceptance Corp., Deutsche Morgan Grenfell, and Lehman Brothers.

With other giant issues waiting in the wings, the commercial mortgage- backed market is poised to exceed $40 billion this year, eclipsing last year's record of $29.8 billion, according to Commercial Mortgage Alert, an industry newsletter.

NationsBanc Montgomery Securities Inc. and Citicorp completed an $870 million deal on Thursday. And Chase Securities Inc. and Bear, Stearns & Co. could wrap up a $925 million issue as early as today.

"There's $3 billion of paper in the market, and by historical standards that's an awful lot," said John Dowd, a managing director at Citicorp. "Part of it is the attractive interest rate environment, but part of it is also the evolution of the (real estate) business from private lending to the capital markets."

The commercial mortgage-backed market was launched in the early 1990s when the Resolution Trust Corp. liquidated bad real estate loans by pooling them into securities and selling them to investors.

Soon, investment banks and commercial banks started securitizing their own bad real estate loans, and the market boomed.

In recent months, low interest rates have further fueled the market's growth. Developers have been actively refinancing their mortgages, providing lenders with a steady flow of loans to securitize.

Deals with big dimensions have become increasingly common in the market, experts say. These days, issues routinely range from $1 billion to $1.5 billion, compared to $500 million to $700 million one year ago.

Patricia Goldstein, head of global commercial real estate at Citicorp, said the larger deals are benefiting the market. Big issues include diverse pools of assets, which are more appealing to investors.

In general, she said, the market has become more liquid and efficient.

"Before, it was a black box," Ms. Goldstein said. "Today, you have standards and requirements, and everybody is learning from this process together."

Many jumbo issues are being led by combinations of commercial and investment banks. Firms are working together to increase the market's efficiency and to offer the most diversified portfolios to investors.

"We may be competing to originate the loan, but we join forces to create the security," said Charles Dunleavy, chief operating officer and executive vice president of GMAC Commercial Mortgage.

"It's in our mutual best interest to go get the security closed and sold quickly."

GMAC, for instance, teamed up with Deutsche Morgan Grenfell, Lehman, and thee other shops for September's $1.7 billion securitization. Deutsche Morgan Grenfell, which only began securitizing commercial mortgages earlier this year, is gearing up for another $1.2 billion issue in December, which it will co-lead with GMAC and Goldman, Sachs & Co.

"Size is important in the marketplace," said Mike Greco, a managing director of real estate capital markets at First Union Corp. Whether deals need to get bigger, he said, "is left to others to decide."

With the influx of supply, spreads have widened 15 to 20 basis points on all classes of commercial mortgage-backed securities in the last 30 to 45 days, market experts say.

Some are questioning whether the market can absorb such sizable securities.

"While you have all the benefit of size, I don't expect the average size to go from $2 billion to $3 billion," one lender said. "It might actually come down.

"There's some question about whether size starts to cause more problems than the benefits it creates," the lender added.

Joel Horne, a director in commercial real estate finance at Deutsche Morgan Grenfell, said he does not expect the market to decline. "'But I don't see it increasing at the same kind of rate," he said.

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