CMBS or Commercial mortgage-backed securities are income-generating investment products backed by commercial real estate loans. CMBS provides liquidity to both commercial lenders and real estate investors. Because there are hardly any rules for standardizing CMBS structures, it can be hard to evaluate them.
How Do Commercial Mortgage-Backed Securities Work?
Just like collateralized mortgage obligations (CMO) and collateralized debt obligations (CDO), CMBS comes in the form of bonds. The mortgage loans act as the collateral in case of a default, with the interest and principal passed along to the investors. The loans are usually contained in a trust, and they are also diversified in their property types, terms, and amounts. The loans securitized into commercial mortgage-backed securities comprise loans for various properties such as factories, apartment buildings, hotels, office parks, shopping malls, and office buildings, usually within the same trust.
Considering the complexity of CMBS, such investments require different market participants such as trustees, a master servicer, a primary servicer, a special servicer, rating agencies, a directing certificate holder, and investors. Each party plays a specific role in making sure that CMBS performs well.
Types of CMBS
CMBS-backed mortgages are grouped into tranches according to credit risk level, which is usually ranked from highest to lowest quality. The highest quality tranches receive both principal and interest payments, and they also have low risks. Lower tranches, on the other hand, are associated with more risks, but they also have the highest interest rates.
The securitization procedure involved in creating a CMBS structure is crucial for both investors and banks. It enables banks to give more loans and allows investors to access different commercial real estate properties while giving them more benefits than traditional government bonds.
However, investors also need to understand that in case of a loan default (whether one or multiple) in a CMBS, the highest trances will be prioritized where they are fully paid off before the lowest tranches can be paid.
Criticism of CMBS
Usually, only wealthy investors consider CMBS because the average investor does not have many options here. It is challenging to find exchange-traded funds (ETFs) or mutual funds that only invest in this asset group.
If you are interested in investing in commercial properties, CMBS is not your only option. Rexford Commercial Capital provides commercial real estate financing to investors. Give us a call today, and we can help you find a loan product tailored to your needs.