Asset and wealth managers say that while uncertainty remains in the commercial real estate market, opportunities exist for investors. Many hope the Fed’s rate cuts will spur a recovery in the sector, as lower rates mean cheaper debt and less burdensome financing costs. But now, doubts remain about whether the central bank will cut interest rates further this year. The Fed said in December it would cut interest rates twice in 2025, and Friday’s hot jobs report reassured Wall Street that there would be no change in interest rates at the Fed’s next policy meeting later this month, according to the CME FedWatch tool. The latest jobs data also pushed U.S. Treasury yields to their highest levels since November 2023. In addition to potential capital appreciation, investors can also receive steady 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 trailing 12 months. John Kerschner, head of U.S. securitized products and portfolio manager at Janus Henderson Investors, said commercial real estate could do “well” at current borrowing rates, even if interest rates are uncertain. “This ‘worst-case scenario’ of doom and gloom has now been put aside,” he said. In other words, investors should be selective when choosing assets. “In commercial real estate, it’s very, very difficult to passively go in and buy a deal without knowing what’s going on behind the scenes,” said Kerschner, who manages the Janus Henderson Securitization Income ETF (JSI), which has 30% CMBS exposure. He sees opportunities in multifamily, industrial, data center and some office mortgages. In an office building, for example, location and architectural quality matter, he said. “The best buildings, the best neighborhoods, the best facilities will do well,” he said. JSI 1Y mountain Janus Henderson Securitization Income ETF over the trailing 12 months. Kerschner pointed out that data centers will be a big beneficiary of the demand for artificial intelligence computing power. He said that because the asset class is relatively new, spreads tend to be wider, meaning they have lower transaction costs. “If the distribution is broader, then you’re basically attracted to doing that work and figuring out whether it makes sense for your portfolio,” he explained. Diamond Hill’s Gimple likes to stick to single-asset, single-borrower CMBS and commercial real estate collateralized loan obligations (CLOs). The former involves an asset (such as an office building or a high-end hotel) or a single borrower (which could be a hotel chain with multiple locations), while a CLO is a short-term floating-rate transaction. He said they are often used by companies to upgrade properties, such as installing swimming pools or energy-efficient air conditioning in apartment complexes. “You’re looking at 200 to 300 (basis points) spreads in the CMBS market, particularly within (single asset, single borrower) and CRE CLOs, which is still very attractive relative to credit – maybe the same or even Better credit risk,” Gimple said. One basis point is equal to 1/100 of one percent, or 0.01%. He said that by looking at a single asset, a single borrower asset, investors can better understand what they are buying compared to conduit CMBS, which is a pool of loans. “You get a clearer picture of risks and opportunities,” Gimple explains. However, he added that every investment depends on the transaction. As of Dec. 31, Diamond Hill’s Short-Term Securitized Bond Fund (DHEIX) had 21.6% of its portfolio in non-agency CMBS. CLO. There are also smaller grants for laboratories, restaurants, offices and retail. DHEIX 1Y mountain Diamond Hill Past year short-term securitized bond fund. David Gottlieb, wealth manager at Savvy Advisors, said those who want to invest in CMBS should not invest blindly but should seek out a suitable financial advisor. This is because the industry is complex and there are “imposters” in the industry. “When you’re dealing with something as complex as this, it’s essential to consult with people who have a track record, a knowledge base, who can demonstrate their wisdom and then have a fiduciary duty to guide you properly,” he said. Gottlieb’s expertise is For real estate investing, he likes to use CMBS for liquidity and as a hedge against property ownership. His clients typically allocate 5% to 10% of their fixed-income portfolios to CMBS. “It’s important to have it, even if it’s just a small part of a fixed-income portfolio — if there’s nothing but liquidity factors,” he said. However, it may not be suitable for everyone. “You have to investigate whether it’s right for you,” Gottlieb said.
Look for income in commercial real estate as interest rates climb, experts say | Real Time Headlines
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