CMBS Market (Commercial Mortgage Backed Securities)

Before we can understand what the CMBS market is, we need to clearly understand what Commercial Mortgage Backed Securities are. CMBS for short are like mortgage-backed securities that are secured by commercial property loans such as multi family housing, restaurants, hotels and shops, instead of residential properties. Today, this market accounts for some estimated $ 450 billion of the total commercial real estate debt. A key market as it provides diversity and liquidity to real estate investors, who put their money into commercial properties, the CMBS market is not as simple as one might think.

The first thing that one needs to understand about commercial mortgages is that they are more complex and are less standardized especially when it comes to certain procedures and underwritings than in residential mortgages. Also known as conduit loans, Commercial Mortgage Backed Securities is now playing an important part in the real estate industry. CMBS have helped capital to flow into the real estate sector, while at the same time offering broader borrowing options. And now that mortgages are becoming freely interchangeable, with one another, CMBS are playing an even more central role.

One factor for the overall growth of this market is that loan documentation has become more standardized. This makes it easier to scrutinize loans and has resulted in greater investor acceptance. Another key factor why people are finding the CMBS market more appealing is the higher returns, easier prepayment features, and the opportunity to diversify your loans. And since commercial mortgages have strict penalties on prepayment restrictions, the risk is limited. Saying this, it is vital to keep in mind that CMBS have a higher default risk than residential mortgages as the payments here rely on the financial circumstances of businesses backing the mortgages. In order to protect CMBS investors, there are certain protections in place such as letters of credit and subordination. These in turn safeguard the investor from default by outside payment guarantees.

While entering into this market, it is key that you do so with your eyes wide open. Don’t forget to read the fine print and make sure that you choose wisely. Speak to a number of fellow investors as well as this will help you get an idea of what you are entering into. Remember that CMBS are a long term investment, so it is prudent to think long and hard before you take any action.