Although uncertainty remains in the commercial real estate market, there are still opportunities for investors, asset managers and asset managers say. Many had hoped the Fed’s rate cuts would spur a recovery in the sector, as lower interest rates mean lower debt burdens and less onerous financing costs. But now there are questions about whether the central bank will cut rates further this year. The central bank signaled two rate cuts in 2025 in December, and Friday’s jobs report gave Wall Street confidence that interest rates would remain unchanged at the Fed’s next policy meeting later this month, according to the CME FedWatch tool. The latest payroll numbers also pushed U.S. Treasury yields to their highest level since November 2023. But nevertheless, “with volatility comes opportunity,” said Douglas Gimple, senior portfolio specialist at Diamond Hill. In addition to potential capital appreciation, investors can earn guaranteed income from commercial mortgage-backed securities (CMBS). The iShares CMBS ETF, which tracks investment grade CMBS, has a 30-day SEC yield of 4.04% and an expense ratio of 0.25%. CMBS 1Y Mountain iShares CMBS ETF for the past 12 months. John Kirshner, head of U.S. securitized products and portfolio manager at Janus Henderson Investors, said commercial real estate is “doing OK” at current borrowing rates, even with the uncertainty about the future of interest rates. “This doom and gloom ‘worst case scenario’ has now been sort of pushed aside,” he said. That said, investors should be cautious when choosing assets. “In commercial real estate, it’s very difficult to just passively go in and buy a deal without knowing what’s going on inside,” said Kirshner, who manages the Janus Henderson Securitized Income ETF (JSI). ” he said. The fund has 30% exposure to CMBS. He sees opportunities in multifamily, industrial, data center and some office mortgages. For example, in the case of office buildings, location and building quality are important, he said. “The best buildings, the best neighborhoods, the best facilities are going to work well,” he says. JSI 1Y Mountain Janus Henderson Past 12 Months Securitized Income ETF. Kirshner noted that data centers will be a big beneficiary of the demand for computing power from artificial intelligence. Because the asset class is relatively new, it tends to have wide spreads, meaning it trades cheaply, he said. “If you have a wide spread, you’re basically tempted to do the work to determine if it makes sense for your portfolio,” he explained. Diamond Hill’s Gimple prefers to stick to single-asset, single-borrower CMBS and commercial mortgage debt (CLOs). While the former involves a single asset, such as an office building or a luxury hotel, or a single borrower, such as a hotel chain with multiple locations, CLOs are short-term floating rate transactions. He said these are typically commissioned by companies to upgrade properties, such as installing pools or energy-efficient air conditioning in apartment complexes. “Spreads in the CMBS market, particularly within (single asset, single borrower) and CRE CLOs, are around 200 to 300 (basis points), which is still very attractive compared to credit. It’s probably the same. ”or more credit risk,” Gimple said. One basis point equals 1/100th of a percentage, or 0.01%. He said single-asset, single-borrower assets allow investors to better understand what they are buying compared to conduit CMBS, which are pools of loans. “You can see the risks and opportunities a little more clearly,” Gimple explained. Still, he added, all investments depend on trading. Diamond Hill’s Short-Term Securitized Fixed Income Fund (DHEIX) had 21.6% of its portfolio in non-agency CMBS as of Dec. 31. The company’s largest non-agency CMBS holdings are single-family rentals, followed by multifamily and CRE CLOs. There are also smaller assignments for laboratories, hospitality, offices, and retail stores. DHEIX 1Y Mountain Diamond Hill Short Term Securitized Bond Fund for the past year. People who want to open their eyes and invest in CMBS should not do so blindly, but instead hire the right financial advisor, said David Gottlieb, wealth manager at Savvy Advisors. That’s because the field is complex and there are “impersonators” within the industry. “When dealing with complex issues like this, it is essential to consult someone with a proven track record, knowledge base, proven acumen, and fiduciary duty to properly guide you,” he said. said. Mr. Gottlieb’s own specialty is real estate investing, and he prefers to use CMBS as a hedge against liquidity and real estate ownership. His clients typically allocate about 5% to 10% of their fixed income portfolios to CMBS. “Even if it’s just a small part of your bond portfolio, it’s important to hold it just for the liquidity factor,” he said. However, it may not be right for everyone. “You have to do your research to see if it’s right for you,” Gottlieb says.
Experts say securing income in commercial real estate as interest rates rise
