Commercial real estate—like its much bigger residential cousin—is starting to get hammered by the credit crisis and slumping economy. But for investors, the news isn't all bad.
Regional banks and some real estate investment trusts, or REITs, are likely to get hit hard as delinquencies on commercial real estate loans rise. But oddly, commercial mortgage-backed securities, or CMBS, are offering outsized gains with less risk than you might think.
This offers some attractive benefits for investors in REITs and mutual funds that have CMBS in their portfolios.
“Those bonds today are trading at 14-16 percent yields—it’s outrageous," Darrell Wheeler, a CMBS analyst with Citigroup. "I’d rather have that than a US Treasury—that’s how dislocated the market is.”
Commercial-mortgage securities are in far better shape than their residential counterparts, even though they've been sold off as investors dump anything related to real estate. That's because the underwriting standards have typically been tighter for CMBS, especially in recent years when people could get residential mortgages with little or no documentation.
Roughly 80 percent of CMBS bonds are still rated Triple A. They're also structured so that investors are largely insulated from anything but large-scale defaults.
“That means three-quarters of the pool has to default before you could lose any money,” explains Wheeler.