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A Basic Guide To Understanding CMBS and Commercial Real Estate

commercial real estate loansCMBS have been all over the news lately, specifically because there’s a trend going on right now involving a high number of CMBS reaching maturity. But what exactly is a CMBS, and what do you do with one? Let’s start at the beginning:

  • First, a commercial real estate loan is also sometimes called a commercial mortgage; it’s issued to someone who wishes to build on commercial land, rather than residential land, and it can be used for developing a commercial building or simply purchasing a piece of commercial land. For this reason, these loans are often considered construction loans.
  • CMBS are commercial mortgage-backed securities, and they refer to any commercial mortgage-backed security. They tend to be much more complex than residential-backed securities because of the complex web of property assets influencing mortgage rates and property values.
  • Over the past 10 years or so, commercial real estate loans have become hot topics in the real estate industry — specifically because a large number of CMBS are maturing between 2014 and 2017. In fact, it’s believed that about $1.4 trillion worth of commercial mortgages will mature during this time, and CMBS will represent about one quarter of this total amount — it’s estimated that 11,000 CMBS will mature during this time.
  • CMBS typically have fairly low risk involved, since the term is typically fixed for this type of mortgage. Even though statistics show that the global real estate market is still a bit shaky right now, economists believe that the U.S. commercial real estate market will remain fairly stable throughout 2015 and that this year will prove to have the highest growth rates since the economy crashed in 2008.

So are these types of loans still risky? Yes — like any other type of real estate investment, there will naturally be a certain amount of risk involved. But one of the benefits of commercial real estate investing is that there’s also a chance at great success with the biggest risks — and when you’ve got a strong understanding of the market, you’re more likely to take the risks that will end positively.