Morgan Stanley Dean Witter this week plans to issue $246 million of bonds backed by a Manhattan office tower that earlier this decade was a well-known headache for Chase Manhattan Corp.

The deal, backed by a commercial mortgage, shows how the real estate market has recovered since the dog days of the late 1980s.

But it also demonstrates a paradox that has arisen since the last real estate recession: With securitization the favored method of financing, money can suddenly become harder to come by - even when real estate is performing well.

No one disputes that the 2.4 million-square-foot building at One New York Plaza is now a superb investment, but some investors say Morgan Stanley may have a tough time selling the bonds.

Trizec Hahn Corp. bought One New York Plaza from Chase this year for an estimated $390 million, putting up more than $145 million.

The high level of equity demonstrates the Canadian company's confidence in the building's prospects, observers said.

The building is 99.1% leased, and the downtown office market is tight.

The vacancy rate in New York's South Ferry financial district for class A office space-that suitable for high-quality clients-is 8.3%, according to Torto Wheaton Research, a division of CB Richard Ellis.

In 1989, when Chase bought the building for $140 million, class A office space in the neighborhood was more than 17% vacant.

The building, which suffered the departure of major tenants at a time when Manhattan office space was in oversupply, was ridden with asbestos. Cleanup and renovations cost the bank $140 million.

Today, the loan on the building is of such high quality that Fitch IBCA and Moody's Investors Service gave investment-grade ratings even to the riskiest $29 million of securities.

Most commercial mortgage securitizations have some junk-rated tranches to support the senior bonds.

"The whole loan on a stand-alone basis is investment-grade," said Anthony J. Sfarra, an analyst at Fitch.

"It does speak to the real estate and the whole story."

The building appears to have further potential. Most tenants' rents are $20 to $30 per square foot, though the market rent in the area is $37.85, according to Torto Wheaton.

Most of the leases expire after the loan's effective maturity date, in 2006.

The bond offering's timing, however, is not ideal. Late last week, the spread between U.S. Treasury yields and those of riskier bonds ballooned.

Some traders attributed the widening to worries about emerging markets; others said it was simply due to expectations of a huge corporate debt supply. Either way, it will make new securities issues a tough sell.

"From the customer's point of view, if I see widening, I'm not going to want to buy a new deal," said John Green, who manages $2 billion of commercial mortgage bonds for Travelers Insurance.

Morgan Stanley will also have to compete for investors' attention with three other commercial mortgage issues this week: a $1.7 billion deal from Lehman Brothers; a $900 million offering from GMAC; and a $700 million issue from PaineWebber and Merrill Lynch.

Unlike Morgan Stanley's deal, the others are backed by diverse pools of mostly smaller properties.

These are more popular than single-asset deals among money managers, who would rather avoid the hassle of analyzing large loans, Mr. Green said.

For this reason, he said, bonds backed by single mortgages are more difficult to trade, and hence should pay fatter spreads over Treasury securities than those of standard commercial mortgage issues.

But bonds backed by large loans are popular among insurance companies, whose credit officers are accustomed to analyzing the loans by themselves. Such investors usually flock to the riskier, lower-rated tranches of securitizations.

This has benefited the subordinated pieces of the One New York Plaza deal.

Morgan Stanley's original target for the $29.7 million BBB-minus class was 275 basis points over Treasuries; by Friday it had tightened price talk to 230 to 240.

The rating agencies penalized the One New York Plaza deal for having only one mortgage as collateral.

The highest-rated $142.6 million of the offering is supported by the other 42%.

The AAA-rated portions of most commercial mortgage securitizations are supported by only 30% of the bonds, said Michael D. Youngblood, managing director at Banc Of America Securities LLC.

Lack of diversity resulted in a split rating. Moody's rated the $142.6 million of senior bonds AAA, but Fitch would give them only an AA rating. Fitch rarely gives AAA ratings to single-asset securitizations, Mr. Sfarra explained.

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