What is Commercial Mortgage-Backed Security?

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Commercial mortgage-backed securities (CMBS) are fixed-income investment products that are backed by mortgages on commercial properties rather than residential real estate. CMBS can provide liquidity to real estate investors and commercial lenders alike.Because there are no rules for standardizing the structures of CMBS, their valuations can be difficult. The underlying securities of CMBS may include a number of commercial mortgages of varying terms, values, and property types—such as multi-family dwellings and commercial real estate. CMBS can offer less of a pre-payment risk than residential mortgage-backed securities (RMBS), as the term on commercial mortgages is generally fixed.

Definition

Commercial Mortgage-Backed Securities (CMBS) are a type of fixed-income investment product backed by mortgages on commercial properties, rather than residential real estate. CMBS provide liquidity to real estate investors and commercial lenders, but their valuation can be complex due to the lack of standardized structures.

Origin

CMBS originated in the United States during the 1980s as an innovative financial tool designed to offer more financing options for the commercial real estate market. Over time, the CMBS market has matured and expanded globally.

Categories and Features

The underlying securities of CMBS can include a variety of commercial mortgage loans with different terms, values, and property types, such as multifamily housing and commercial real estate. A notable feature of CMBS is their lower prepayment risk, as commercial mortgages typically have fixed terms. Additionally, CMBS structures are often tiered to cater to investors with varying risk appetites.

Case Studies

A typical case is the 2007 acquisition of Hilton Hotels by Blackstone Group, which was partially financed through CMBS, demonstrating the use of CMBS in large commercial transactions. Another example is WeWork in 2018, which utilized CMBS structured financing to support its office space expansion plans.

Common Issues

A common issue investors might face with CMBS is the difficulty in valuation due to the lack of standardized structures. Additionally, market volatility and economic downturns can increase the credit risk of CMBS. Investors should carefully assess the quality of the underlying assets and market conditions.

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