While volume in the European CMBS market has risen, property fundamentals are softening. Demand conditions are expected to remain weak, and subletting is becoming more common. The office sector is looking increasingly ominous - office rents continues to fall throughout most major European cities, and vacancy rates have reached nearly 10% in London alone - magnifying the importance of a close look at what property sector exposure a transaction might have.

"As vacancy rates approach 10% in central London - from a low of 2% in December 2000 - a number of investors have expressed concerns about the health of the U.K. office sector, which accounts for more than half of the underlying property exposures in European CMBS," explained analysts at Merrill Lynch.

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