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CMBS Players Voice Concern: Is Mart Overheating?

Attendees at the Commercial Mortgage Securities Association's 10th Annual Convention last week in New York expressed concern over lower subordination levels, the erosion of lending standards and some of the structural safeguards put into place 10 years ago, according to BW sister publication Real Estate Finance & Investment.

Attendees at the Commercial Mortgage Securities Association's 10th Annual Convention last week in New York expressed concern over lower subordination levels, the erosion of lending standards and some of the structural safeguards put into place 10 years ago, according to BW sister publication Real Estate Finance & Investment.

Economist Susan Hudson-Wilson, founder and ceo of Portfolio & Property Research, kicked off the conference with a discussion of interest rates: "If you think rates are rising for bad reasons, you will want to sell real estate quick like a bunny and wait for the crash until you get back in," she said. "You have to declare your hand and play it accordingly."

Many delegates, notably noninvestment-grade buyers, believe the market is far too aggressive right now. In particular, two dominant buyers--ARCap's Larry Duggins and Allied Capital's John Scheurer--were very vocal. Subordination levels have dropped steadily for the past three years, with some deals achieving levels as low as 12%. "The pendulum has swung too far and we need to raise levels again," Duggins said.

Kim Diamond, managing director at Standard & Poor's, echoed some of what the B-piece buyers were saying. "New entrants will fuel competition among lenders and we are seeing an erosion of some of the structural enhancements and safeguards," she continued. "Although empirical data show that further compression is possible, it's better to be cautious," she said.

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