Understanding Commercial Mortgage-Backed Securities (CMBS)
The commercial real estate sector is an integral component of the U.S. economy, supporting the development of the country’s office, industrial, retail, and housing infrastructure. CMBS provide access to capital for purchasers of commercial properties, while simultaneously giving investors the opportunity to invest in debt instruments linked to commercial real estate.
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For investors looking for income diversification and higher yield potential.
What are commercial mortgage-backed securities?
Commercial mortgage-backed securities can comprise of packages of commercial property mortgages spanning a range of sectors, such as shopping centres and retail parks; offices; industrials such as logistics warehouses; and the hospitality sector, including hotels. Historically, European commercial real estate (CRE) lending was undertaken by banks who then issued CMBS, though alternative CRE lenders such as private equity and real estate debt funds also now participate in CMBS issuance
Size and history of the U.S. CMBS market
The U.S. CMBS market is a large, well-established market that has been around since the early 1990s. At around $1.7 trillion in market capitalisation, CMBS is bigger than the U.S. high yield market and is the second-largest securitised market in the U.S. behind agency mortgage-backed securities (MBS).
CMBS make up a significant portion of the €13.5 trillion European securitised market
Source: Bank of America, as of December 2023.
Key characteristics of CMBS
1
Compelling yield opportunities
Liquid CRE market access: The sector grants access to the diverse CRE debt market without the high investment minimums, concentration risk, or liquidity constraints of firect investing.
Enhanced yield opportunity: Investors are typically rewarded for the need to take more granular underwriting of individual property risks.
Diversification: Investors can access more localised and sector-specific risk factors.
2
Commercial real estate exposure
The U.S. CMBS market gives investors access to five main subsectors of commercial real estate: Multifamily housing (e.g., apartments, prefabricated homes), office, industrial (e.g., warehouses, data centers), retail, and hospitality (e.g., hotels, casinos, time shares).
3
Interest rate optionality
CMBS deals range from single-asset single-borrower (SASB) (ie. backed by a single, large loan and secured by a single property) to concentrated multi-borrower or ‘granular’ transactions with more diversified collateral pools, but often lower asset quality than SASB. There is also significant variation across CMBS structures. Post GFC, European issuance has tended to be of the single borrower type.
4
Investor-friendly loan provisions
Prepayment penalties for borrowers ensure that prepayment risk in CMBS remains very low. When prepayments occur, investors may receive compensation from the borrower.
5
Strong credit ratings on offer
CMBS may help to increase a portfolio’s overall credit quality due to the availability of tranches with strong credit ratings.
Risk considerations for CMBS
Credit risk: Like other fixed income securities, CMBS are exposed to the risk of default.
Extension risk: If a CMBS loan matures in a difficult refinancing environment, the servicer may modify or extend the loan instead of foreclosing. In such scenarios, investors could get their principal back later than originally expected.
Recovery risk: Unlike residential real estate loans, commercial mortgages are non-recourse loans, meaning only the attached property can serve as collateral for the loan. This may result in lower recovery rates (i.e., the percentage of defaulted debt that can be recovered by a lender) for CMBS versus RMBS.
Why Janus Henderson for securitised investing?
Expertise and leadership: Our portfolio management team's nearly 60 years of combined experience, backed by a dedicated global team, stands as a testament to our success. This unparalleled expertise ensures we remain at the forefront of securitised investment management.
Market dominance: Janus Henderson is the 3rd largest active fixed income ETF provider globally based on U.S. markets and the 9th overall active ETF provider in the U.S.
Source: Morningstar Asset Flows as of 30th September 2024.
€34.8b
Firmwide securisited assets (as of 30/09/24)
Source: Janus Henderson Investors as of 30th September 2024.
Note: Firmwide assets include securitised products available outside of the U.S. and securitised portions of other fixed income strategies.
Dedicated securitised expertise
Global Head of Securitised Products | Portfolio Manager
Head of Structured and Quantitative Fixed Income | Portfolio Manager