Time to Worry or Time to Invest? The Commercial Mortgage-Backed Securities Market
Douglas Gimple, Senior Portfolio Specialist
That's an area that we've continually looked at, and it's an area where we've found quite a bit of opportunity really coming out, I don't want to say coming out of COVID, because it's still floating around, but coming out of 2020 into 2021. Other sectors had recovered; CMBS, the commercial mortgages had not recovered as much. So, it was an area where we found opportunity. We continue to find opportunity, but rising rates are going to hurt this market.
But we've seen serious delinquencies, serious delinquency rates, so foreclosures have actually been coming down since COVID emerged. Now, the rate at which those delinquencies are going down is slowing. So, we're still seeing them but not as strong, I should say. It's getting a little bit worse, but it's still not as bad as it had been if that makes sense. But the ability to diversify within CMBS, specifically non-agency commercial mortgages, is key.
There are areas that will continue to create concern, not just because we may be headed to a recession. We do have rising rates, but something like office. Office space: I can tell you that I'm in the office today, but attendance is much lower than what it was pre-Covid, and that's going to continue. There are some places of work where you don't have to go to the office. We're looking at maybe 60% expected time in the office. So, does that change our footprint of square feet that we have? And so, that's something that we keep an eye on. That's an area that we don't like as much. So outside of rising rates and recession, there's the component of the dynamics of the work environment and shifting to more work-from-home than being in the office.
But counter to that, you've got the growth in warehousing, as Amazon continues to take over the world and wants to build more and more facilities where they can get it to you same day — that continues. And that is a growing part of CMBS. Multi-family: if you drive around where I am, Columbus, Ohio, you see new apartment buildings going up all the time.
So, there are concerns, as there always will be if we are headed into a recession or we're in the midst of a recession. But there are ways to mitigate that — by understanding what you own, by doing the due diligence, by looking at the remittance reports that come out every month, so you can see, “Are we starting to see some more cracks? Are we starting to see some areas of concern in these different areas of CMBS?"
So yes, there are concerns, as much as there are concerns about other parts of the economy with regards to rising rates and the potential recession. But being able to manage that and mitigate that risk is what's most important for us because there's not a bad bond, there's just bad bond pricing. Because if I'm getting paid enough to take on the risk, then I'm going to be able to do that and it's going to meet my needs of risk/reward.
But for us, it's an area that we look at very closely. It's something that we monitor when the remittance reports come in between the 15th and the 25th of each month, because we want to keep an eye on it. We want to see if we're starting to see cracks. But I think that if you have the right approach, you can definitely find the right opportunities. But as with anything right now, you've got to be a little bit more cautious. You have to really examine the underwriting to make sure that you're getting what you expect from a risk standpoint.