Investors, servicers, sponsors and other professionals involved in securitizing real estate debt are pinching themselves at the success their industry has enjoyed over the past couple of years. But nobody thinks the good times will roll forever. What’s keeping investors up at night is figuring out when the other shoe is going to drop. That was the mood at this week’s Commercial Mortgage Securities Association CMBS Investors’ Conference held in Miami.

The volume of commercial mortgage-backed securities (CMBS) and collateralized debt obligation issuances (CDOs) has ballooned the past two years. CMBS issuance hit $299.2 billion in 2006, a $60 billion gain over 2005 — and more than double 2004’s volume of $128 billion. Meanwhile commercial real estate CDO issuance grew to $34.3 billion in 2006 — a 62% gain from 2005 and more than four times the volume of issuances in 2004. Robert Ricci, managing director for Wachovia Securities projects 2007 volume will reach $60 billion. Meanwhile delinquencies and defaults for loans in the pools are at record lows. And that’s exactly what’s making some pros worry.

With everything humming along, spreads between different credit classes have tightened. That represents one risk. At the same time, the lack of any real blowups in CMBS means that fewer people in the industry have the experience of working through a down cycle.

“We don’t have a have lot of skilled people in system to deal with workouts,” says Charles Spetka, president of CWCapital Asset Management. Today, younger executives are working up the ranks, but few have experienced the hardships of a true real estate downturn. When things do go bad, experts expect there to be a race to hire anyone with experience in navigating troubled waters.

Of all commercial property types, CMBS investors are most bearish on the retail sector. All four panelists in one session pointed to the office sector as the best bet for 2007 with multi-family and industrial also garnering a few nods. Randy Mundt, president and chief investment officer for Principal Real Estate Investors, then noted the lack of optimism for the retail sector, which spurred a brief back-and-forth on the topic.

“We’re most cautious on retail today,” Mundt said. “We’re concerned by consumer-related issues and worried about retailer credit. It’s never been a strong credit industry anyway. And now there’s a lot of LBO [leveraged buyout] activity, which is worrisome.”

Steve Coyle, managing director and chief investment strategist for Citigroup Property Investors, was even more bearish. “There will be fallback — in six months to a year — from consumers pinched by falling home prices,” Coyle said. “We worry about malls even more than shopping centers because of this, but we’re worried about both.”

Michael Gilberto, managing director for JP Morgan Asset Management added that he wasn’t too optimistic about shopping centers either because of the amount of construction in that sector. “Those centers have built more space than any time than 1990,” he said.

Despite retail worries, commercial real estate financiers are getting a lot of mileage out of their newest toy — commercial real estate CDOs. The final data for 2006 presented at CMSA’s CMBS Investor Conference shows that CDO issuance grew to $34.3 billion in 2006 — a 62% gain from 2005 and more than four times the volume of issuances in 2004. Ricci of Wachovia projects 2007 volume to reach $60 billion.

There are a lot of differences between CMBS and CDO but the key difference is that issuers have the option to actively manage the pool of assets inside commercial real estate CDOs. They can cycle loans in and out, change property types and change geographic distribution — within limits, of course. Issuers are also not limited to fixed-rate mortgages. It can include that, but more commonly includes floating rate debt of all stripes. Managed pools can also include REIT and REOC debt, mezzanine financing, preferred equity and other derivatives. Another difference is that unlike with CMBS issuances, sponsors can (and often do) retain ownership of some of the pool.

From a sponsor standpoint, it seems to be an attractive option and CDOs promise to play a growing role in providing financing for the commercial real estate sector. And, because the pools are actively managed, sponsors can charge higher fees — as high as 45 basis points compared with 20 basis points for CMBS.