For Model Predictive control purposes, your system must be observable in its state-space representation.
This being said, an observable system can become unobservable do to numerical errors. Thus, you could modify the state estimator gain using :
setestim(MPCobj,M);
Also, if your system is not defined in a state-space representation (e.g. TF), MATLAB will convert it to one. In this case, try using
MPCobj.Model.Plant=ss(model,'min');
Where your system will converted in its state-space representation with the minimal number of states.
Hope this helps
