NEW YORK - Panelists at last week's Real Estate Opportunity Fund Investing conference sponsored by Information Management Network said that subordinated CMBS still hold value.

They expressed preference for the subordinated parts of the CMBS structure, specifically double-Bs, which are showing a very good profile right now depending on how investors leverage them.

In terms of the sectors to be in, panelists spurned healthcare and were mixed in regards to the hospitality sector.

Bill Jacobs, managing director at Cheslock Bakker & Associates, said that he is staying away from the hospitality sector because it is too speculative, as well as healthcare because of government-related issues. He favors better-quality office, large industrials, retail and large multi-family collateral.

Though the other panelists agreed with Jacobs that healthcare is a bit too risky right now, they disagreed in terms of the hospitality sector, where they think there are still opportunities to be had in this part of the market as long as the proper underwriting is done.

The credit picture

Underwriting was a major issue for the panel especially in light of rising defaults. But panelists said that even though defaults are on the rise, they are not at catastrophic levels. However, this is not to say that the effect of deteriorating fundamentals is not being felt in the market at all, especially in terms of CBOs.

Participants said that the high-yield CMBS arena is currently being pulled in two directions. On the one hand, fundamentals are deteriorating. The lack of deal flow in commercial mortgages has caused lenders to be less stringent in terms of underwriting new loans. However, the CBO bid has been very robust causing spreads to tighten.

The issue of terrorism insurance remained an important part of the discussion. Panelists said that one way to hedge the risk involved with the lack of such insurance is through diversification in the deal. Another option is to "lend less and increase the amount of equity cushion that is in front of you," said a panel member. Or else, he continued "we should get paid for the risk."

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