Commercial Mortgage Backed Securities: 101

As with many investments, the Commercial Mortgage Backed Security (CMBS) market has been scarred by the economic recession. Recent history provides us with figures of a record setting 2008, with 234 billion in loans. By 2009 the good times came to an abrupt halt and the market produced a dismal 3 billion in loans. I know you are sitting there asking yourself “why is this idiot wasting his time writing on a topic that is in the tank?” To answer your question, for the first time in 33 months the Commercial Mortgage Backed Security (CMBS) market has seen a decline in delinquencies. In fact, just in the past couple of weeks three new CMBS transactions have gone to market. We seem to have found the bottom in the CMBS market and there is significant investment opportunity on the horizon. With that being said, I find it important to give you the ABC’s on what may be a potentially profitable investment tool.

In its most basic form a CMBS is a bond. This bond consists of a group of commercial loans (possibly 30 or more) bundled together by an investment bank. These bundles could be made up of retail, office, industrial or multi-family loans of varying sizes and maturities. These securities are valued and sold as bonds to real estate investment trusts (REIT) or to private investors. The CMBS pays out a steady stream of cash over a number of years to the investor. You may have heard of mortgage backed securities (MBS) which are simply bundled residential mortgages. The advantages of CMBS over MBS are the structural features such as “lock outs” or “defeasance” that protect against the prepayment of the loans. Prepayment essentially ends the principle and interest payment that produce your steady return. 

With the current market in limbo, investors interested in a secure investment with a fixed income should consider CMBS. CMBS are a great alternative to stocks and with the market at a bottom this may be a great time to capitalize the current situation.