While uncertainties remain in the commercial real estate market, there are still opportunities for investors, according to asset and wealth managers. Many were hoping the Federal Reserve ‘s rate cuts would spur a recovery in the sector, since lower rates mean cheaper debt and less burdensome financing costs. But now, whether the central bank will reduce rates any further at all this year is in question. The central bank in December signaled two rate decreases in 2025 — and Friday’s hot jobs report left Wall Street sure that rates won’t change at the Fed’s next policy meeting later this month, according to the CME FedWatch tool . The latest payroll numbers also drove U.S. Treasury yields to their highest since November 2023. Despite it all, however, “with volatility comes opportunity,” said Douglas Gimple, senior portfolio specialist at Diamond Hill. On top of potential capital appreciation, investors can earn solid 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%, with an expense ratio of 0.25%. CMBS 1Y mountain iShares CMBS ETF in past 12 months. Even with the path of interest rates unclear, commercial real estate can do “okay” at current borrowing rates, said John Kerschner, head of U.S. securitized products and portfolio manager at Janus Henderson Investors. “This doom and gloom ‘worst case scenario’ has kind of been pushed aside now,” he said. Kicking the tires That said, investors should be selective when choosing assets. “In commercial real estate, it’s very, very difficult to just go in passively and buy deals and not know what’s kind of under the hood,” said Kerschner, who manages the Janus Henderson Securitized Income ETF (JSI). The fund has 30% exposure to CMBS. He sees opportunity in multifamily, industrial, data center and some office mortages. For instance, among office buildings, location and building quality matter, he said. “The best buildings, best neighborhoods, great amenities are going to do fine,” he said. JSI 1Y mountain Janus Henderson Securitized Income ETF over past 12 months. Data centers will be a big beneficiary of demand for computing power stemming from artificial intelligence, Kerschner noted. Because the asset class is relatively new, they tend to have wider spreads — meaning they trade cheaply, he said. “If it is a wider spread, then you’re basically enticed to do the work and figure out if it makes sense for your portfolio,” he explained. Diamond Hill’s Gimple likes to stick with single-asset, single-borrower CMBS and commercial real estate collateralized loan obligations (CLOs). The former involves one asset — such as an office building or high-end hotel — or a single borrower, which can be a hotel chain with multiple locations, while CLOs are shorter-term, floating-rate deals. They are usually taken out by a company to upgrade a property, like putting in a pool or energy-efficient air conditioning into an apartment complex, he said. “You’re looking at like a 200- to 300 [basis point] spread in the CMBS market, specifically within [single-asset, single-borrower] and CRE CLO, and that’s still really attractive relative to credit — for maybe the same or even better credit risk,” Gimple said. One basis point equals 1/100th of a percent, or 0.01%. With single-asset, single-borrower assets, investors get a better understanding of what they are buying compared to conduit CMBS, which are pools of loans, he said. “You can understand the risks and the opportunities a bit more clearly,” Gimple explained. Still, every investment is deal dependent, he added. Diamond Hill’s Short Duration Securitized Bond Fund (DHEIX) had 21.6% of its portfolio in non-agency CMBS, as of Dec. 31. Its largest non-agency CMBS holding was single family rental, followed by multifamily and CRE CLOs. There are also small allocations to laboratories, hospitality, office and retail. DHEIX 1Y mountain Diamond Hill’s Short Duration Securitized Bond Fund over the past year. Eyes open Those who want to invest in CMBS should not do so blindly, but should instead get the right financial advisor, said David Gottlieb, a wealth manager at Savvy Advisors. That’s because the sector is complex and there are “pretenders” in the industry. “When you’re dealing with complex things like this, it is integral to consult with someone who has a track record, who has a knowledge base, who can prove their acumen and then guide you correctly under a fiduciary obligation,” he said. Gottlieb, whose own specialty is real estate investing, likes to use CMBS for liquidity and as a hedge against property ownership. His clients typically allocate about 5% to 10% of their fixed income portfolio to CMBS. “It is important to have it, even if it is just a fraction of a fixed-income portfolio — if nothing but for that liquidity factor,” he said. However, it may not be right for everyone. “You have to investigate whether or not it is going to be the right fit for you,” Gottlieb said.
