The commercial mortgage-backed securities (CMBS) market presents a unique set of opportunities for investors, especially as interest rates climb. CMBS typically involve one asset, such as an office building or high-end hotel, or a single borrower, like a hotel chain with multiple locations. These investments are characterized by shorter-term, floating-rate deals. Despite the uncertainty surrounding interest rate trajectories, experts believe that CMBS can still yield attractive returns.
David Gottlieb, a wealth manager at Savvy Advisors, emphasizes the importance of consulting a knowledgeable financial advisor before venturing into CMBS investments. He asserts that understanding the intricacies of these securities is crucial for long-term success.
"When you're dealing with complex things like this, it is integral to consult with someone who has a track record, who has a knowledge base, who can prove their acumen and then guide you correctly under a fiduciary obligation," said David Gottlieb.
The current economic environment poses challenges and opportunities for commercial real estate. The Federal Reserve recently signaled two rate decreases slated for 2025. Meanwhile, a robust jobs report has left Wall Street confident that the Fed will maintain current rates at its upcoming meeting. Despite these variables, experts like John Kerschner of Janus Henderson Investors believe that the best properties in prime locations with superior amenities will remain resilient.
"The best buildings, best neighborhoods, great amenities are going to do fine," stated John Kerschner.
Investment vehicles like the iShares CMBS ETF and Janus Henderson Securitized Income ETF offer investors exposure to CMBS, both boasting a 30-day SEC yield of 4.04% with an expense ratio of 0.25%. These funds provide a way to gain from CMBS's liquidity and hedge against property ownership risks.
Douglas Gimple from Diamond Hill highlights the attractiveness of CMBS spreads, which range from 200 to 300 basis points. He advises focusing on single-asset, single-borrower CMBS and commercial real estate collateralized loan obligations (CRE CLOs).
"You're looking at like a 200- to 300 [basis point] spread in the CMBS market, specifically within [single-asset, single-borrower] and CRE CLO, and that's still really attractive relative to credit — for maybe the same or even better credit risk," noted Douglas Gimple.
John Kerschner advises against passive investment approaches in commercial real estate. He stresses the necessity of investigating potential deals thoroughly to understand underlying risks and benefits.
"In commercial real estate, it's very, very difficult to just go in passively and buy deals and not know what's kind of under the hood," Kerschner explained.
Data centers are projected to be significant beneficiaries of the rising demand for computing power, driven by advancements in artificial intelligence. This trend further solidifies the potential of specific segments within commercial real estate to thrive.
Experts argue that the current market volatility opens doors for strategic investments in CMBS. Gottlieb recommends maintaining a fraction of these securities in fixed-income portfolios for their liquidity advantages.
"It is important to have it, even if it is just a fraction of a fixed-income portfolio — if nothing but for that liquidity factor," advised Gottlieb.
Diamond Hill's Short Duration Securitized Bond Fund (DHEIX) had 21.6% of its portfolio in non-agency CMBS as of December 31. According to Gimple, understanding these securities allows investors to navigate risks and capitalize on opportunities effectively.
"You can understand the risks and the opportunities a bit more clearly," Gimple remarked.