The Best of Times. The Worst of Times.

It’s the best of times and the worst of times for the CMBS market, as a wave of big conduit deals in the pipeline comes up against investors who are increasingly wary of the strength of underwriting on those deals.

CMBS volumes are reaching levels not seen in a decade, fueled by low interest rates, strong market liquidity, and high demand. Some $300 billion in existing mortgage loans will come due between 2015 and 2017, and the holders of those loans are eager to refinance them early in order to take advantage of the favorable lending environment. The wave of loans made in 2006 and 2007 are reaching their 10-year maturity dates, and many borrowers are opting for short-term defeasance rather than take the risk of refinancing into a less hospitable market.

The question is how favorable the CMBS market is going to be now that investors are starting to reject deals as too risky. A case in point: a $1 billion conduit from Deutsche Bank at the end of September failed to sell for more than a week before it was repriced with more generous spreads. According to Reuters, the conduit’s main Triple A class sold at 125 basis points over swaps, compared to 95 basis points for similar deals this year, while the first-loss Triple B-minus class prices at 525 basis points, up from the 370 basis points we’re been seeing.

The main issue with the Deutsche Bank offering was the inclusion of a $115 million mortgage on Prudential Plaza in downtown Chicago. That property previously had a 2006 CMBS loan that recently had to be worked out, with investors taking a $75 million loss and the borrowers gaining debt forgiveness. The appraisal for the new loan is rich enough that the borrower could have covered the full balance of the legacy loan, leading analysts to question whether the previous appraisal was way off, or whether the current underwriting is too generous to the borrower.

It’s reasonable that investors should be cautious. The month-by-month CMBS delinquency rate for 2015 looks like a saw blade, falling for two months only to rise again the third. While the overall downward direction is encouraging—the delinquency rate fell by 17 basis points in September after dropping about 30 basis points in the 12 months ending in August—the volatility of this indicator highlights the tensions in the market right now.

Nearly $1.4 billion in loans became delinquent in August, raising the total unresolved loans to $28.4 billion. Most of these loans are able to be refinanced, sometimes after losses incurred by borrowers or investors. However, investors increasingly suspect that underwriters are bending the rules on new loans to minimize the losses on legacy deals.

Trepp reports that in August, CMBS loans totaling $6.2 billion were prepaid, another $3.3 billion in loans were paid at maturity, $0.7 billion were settled after maturity, and $0.8 billion resulted in losses. So about one in seven maturing loans is underwater or barely breaking the surface; but at the same time these loans are being refinanced on terms that are starting to make investors nervous. One suspects that the continuing strength of the market is based more on the flood of capital seeking a home than it is based on strong property fundamentals.