CMBS stands for commercial mortgage-backed security. These loans are popular for certain times of first-position properties. It includes offices, warehouses, hotels, apartments, shopping centers, and retail buildings.

Page Content

• What is CMBS Debt
• Why Use CMBS Debt
• The SunBelt Growth
• Where the Advantage Lies

Why Use CMBS debt?

In urban centers, the really high quality real estate, for the most part, is financed with CMBS debt. We looked at the recent trends going back to the beginning of 2021 for all new CMBS debt that was placed. Again, this is primarily with high quality assets, generally in urban areas, but not exclusively. The new debt has been placed since the beginning of 2021. Usually CMBS financing has been 70% floating. Why is this? Because the hedging costs are up over 900% since 2020. So investors cannot afford to fix their interest rates on CMBS products. They’ve let their rates float. And you’ve seen what the Feds have done with the rate increases. It’s been terrifying, especially for those investors who are on these floating rate loans.

We see overwhelming opportunity in Q4 of 2022 and Q1 of 2023 with a ton of investments that are not going to make sense anymore. Because they are DSCR (debt service coverage ratios), they might not make sense and will invert, meaning the debt service will exceed the free cash flow off of those properties in a large percentage of those CMBS backed buildings in Q4 and Q1 of 2023.

The Sunbelt Growth

This tells us there’s significant opportunities for smart savvy investors to be able to acquire generational assets within the urban centers of the fastest growing major U.S. Cities. Cities like Austin, Dallas, Houston, Phoenix, and Miami. The Sun Belt is strong and growing. But there’s a limited opportunity to acquire first in class generational assets at these locations. Think about New York in the early 1980’s. Think about the turnaround of the crime that happened there. Everyone in real estate in Manhattan in the 1980’s doubled down on real estate, did so knowing it was purely a political problem. If they held until the mid 1990’s and early 2000’s, they did exceptionally well. That opportunity may be present for savvy real estate investors who see the presents opportunities.

Where the Advantage Lies

The people that can see the most opportunities are the ones that are hybrid operators, like Stratiq, who have a sister company that does third party brokerage advisory services and are able to see off market deal flow before it hits the market. If a property hits the market, it will trade at a par price. There’s an opportunity for an outlier, for out performance, to be able to buy a mismarketed asset. So pairing upcoming misaligned listings, misaligned real estate, mismarketed real estate, and a floating rate catastrophe for CMBS and borrowers, we see significant opportunity coming into 2023 and potentially into 2024, for which LP investors and smart general partners can certainly take advantage.