When the going gets tough, and credit slides, the composition in CMBS transactions change, said a recent report from UBS Warburg.

"The interesting thing about the CMBS market is that unlike some other kinds of asset classes you have different product and properties types," said Tom Zimmerman, mortgage researcher at UBS. "So, in a sense, the CMBS market has the ability to shift its composition as credit risk perception changes."

The report said investors change their opinion on each asset class depending on the apparent rise in expected delinquencies and losses. However, these delinquencies must be viewed on a sector-by-sector basis as reasonable delinquency assumptions differ for each sector.

Also, because of historical differences in delinquency rates, rating agencies have used varying amounts of stress for the different property types.

UBS highlights recent changes in three CMBS sectors: healthcare, hotel/motel and multifamily. Investor concern has been most prominent in the healthcare and hotel/motel arenas.

The healthcare sector has been plagued by lower reimbursement rates, hitting many nursing homes and health care operators. Many of them went into bankruptcy and experienced financial difficulty. According to the report, these caused many B-piece investors not to buy non-investment grade securities from CMBS transactions that had more than a small percentage of healthcare collateral.

Investors have also avoided the hotel/motel sector. Citing overbuilding as the main culprit, especially in light of the softening economy, UBS said that the sector has been a scant presence in CMBS in recent times.

"Percentages from the hotel and nursing sectors declined sharply over the past several years," said Zimmerman. "The latter was already a relatively small contributor, and is now virtually eliminated from conduit deals. The hotel sector has also experienced a sharp decline, falling from over 10% in 1998 to around 6% in 2000."

Multifamily, though still popular with investors, is disappearing due to another factor: competition from Fannie Mae and Freddie Mac.

"Because the agencies need to meet their growth targets, they are going into other territories such as subprime, Alt-A, and multifamily," noted Zimmerman. "I think it's a natural thing for them to do. But in so doing, because they have a funding advantage over other competitors, they can gradually absorb a larger market share."

However, surprisingly, the study showed that the retail and office sectors surged in the first quarter of 2001.

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