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The Essential Guide to Commercial Mortgage Backed Securities (CMBS)

Commercial mortgage-backed securities (CMBS) play an important role in commercial real estate markets. These bonds, backed by mortgages collateralized by office buildings, shopping centers, hotels, multifamily and other types of asset, in 2021 accounted for nearly 21 percent of the $683 billion of commercial mortgages originated in the country, according to the Mortgage Bankers Association. The entire universe of CMBS amounts to $608 billion, according to Trepp Inc. Read on for an overview of CMBS.

What is a CMBS?

Commercial mortgage-backed securities are fixed-income instruments backed by mortgages on commercial properties. This is a common structure in the world of commercial real estate finance, just as it is in the home mortgage sector, where residential mortgages are packaged and resold as residential mortgage-backed securities (RMBS). CMBS loans typically are offered in amounts of $2 million and up.

CMBS are fixed-income securities, meaning bonds that are backed by commercial mortgages. They are instruments that are used as a funding mechanism for mortgages. Investors buy these securities with the promise of receiving a pre-determined yield. The process of creating CMBS starts with lenders who originate loans to owners of commercial properties. Lenders then package these loans into bonds which are sold to investors. To give an analogy, picture a bucket that gets filled with mortgages as lenders write them. The investors who buy these buckets of bonds are then effectively funding the mortgages. A community of investors likes CMBS because they provide diversification and predictability.

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How do CMBSs work?

Commercial real estate mortgages operate a bit differently from residential mortgages. While home loans typically are issued in terms of 15 or 30 years, commercial loans commonly carry terms of two, three, five, seven or 10 years. In another distinction, the typical home loan is issued on an amortization schedule that calls for gradual repayment of the balance. Commercial mortgage borrowers, on the other hand, typically reach the end of their loan term owing a balloon payment of 80% to 90% of the original loan balance. While a homeowner who lives in a house for decades gradually pays down the mortgage, commercial real estate owners refinance frequently. This quirk of the commercial real estate market creates demand for CMBS.

Lenders package the mortgages, which then are sliced and diced into tranches or classes. The classes at the top have little default risk, while the tranches at the bottom of the scaffolding have a greater risk. The reason for that is the way CMBS investors are repaid.

As borrowers make their mortgage payments, those funds are passed through to the bond holders. Everybody gets their interest payments, but the principal payments are directed to the top tranches. Once the top class is paid off, payments move to the next class. As a result, the class at the top experiences the smallest chance of default. The investors at the bottom have greater risk because near the end of the life of the package of loans, the borrower pool might include stragglers who do not make their payments. The investors in the lowest classes are the first to absorb those losses.

How big is the CMBS market?

CMBS balances outstanding stood at $636 billion as of May 2022. That sounds like a lot, but CMBS are just part of the overall commercial real estate financing picture. CMBSs made up 12% of the $5.1 trillion in commercial real estate debt outstanding, according to the CRE Finance Council. Here’s a ranking of the major sources of commercial real estate debt:

  • Banks: 50%
  • Fannie Mae and Freddie Mac: 15%
  • Life insurance companies: 12%
  • CMBS: 12%
  • Other sources: 12%

Banks and life insurance companies typically keep the commercial mortgages they originate on their balance sheets. A point of context: The CMBS market pales in comparison to the much larger residential mortgage-backed securities market.

The CMBS market was created in the early 1990s, in the aftermath of the savings and loan crisis. The market grew rapidly, and CMBS volumes peaked during the real estate bubble of 2005-07, according to commercial real estate intelligence firm Trepp. CMBS issuance all but disappeared during the Great Recession but has recovered in recent years.

What types of CMBSs are issued?

One major distinction among CMBSs is the type of interest rate. Some have fixed rates, others come with floating rates. The typical CMBS packages loans issued to various borrowers and backed by a portfolio of properties. These are known as conduit CMBS. But another flavor of CMBS is the single-asset/single-borrower (SASB) security, which is an instrument based on just one property, or properties owned by one party. This type of financing also is known as private-label CMBS. As of May 2022, conduit CMBS made up about 62% of the overall CMBS market, while SASB or private-label CMBS accounted for 32% of debt outstanding, the CRE Finance Council reports.

CMBS and individual investors

CMBS investors tend to be sophisticated institutional investors, such as pension funds and life insurance companies. But individual investors can get exposure to CMBS. The iShares CMBS ETF, for instance, had $666 million in assets as of late July 2022. The fund has an expense ratio of 0.25% and a trailing 12-month yield of 2.43%.

Pros and cons of CMBS

The CMBS market is robust in part because this type of financing can be attractive to borrowers. Commercial real estate owners can typically borrow at more favorable rates via CMBS than they can from traditional lenders. However, this type of financing also comes with some disadvantages. Here is a rundown of the good and bad, from a borrower’s perspective.


Fixed interest rates

CMBS loans typically offer more favorable interest rates than a borrower could secure with a traditional commercial loan. CMBS loans usually promise fixed interest rates, so the borrower is not subject to interest rate volatility over the life of the loan.

Generous down payment requirements

In general, CMBS loans can be had with up to a 75% loan-to-value ratio, although that’s declined substantially. This comparatively high leverage does not bring correspondingly stricter requirements about the borrower’s net worth and credit history than lower leverage loans.

Non-recourse terms

There is nuance here, but CMBS loans do not carry personal recourse for the borrower. If the borrower defaults, the lender cannot sue to hold the borrower accountable for the loan’s full amount. However, CMBS loans also include fine print that describes situations in which the debt converts from non-recourse to recourse. For example, lying about the borrower’s finances or otherwise committing fraud would annul the non-recourse protection.

Loan assumption is allowed

Most CMBS loans can be assumable. If a borrower sells the mortgaged property and another borrower agrees to assume the loan, the borrower often can transfer the obligation to the third party. The new borrower is subject to the same terms as the original loan agreement. Because most CMBS loans restrict prepayments, this feature gives borrowers some welcome flexibility to execute exit strategies.

CMBS loans create liquidity in real estate markets

A bank might not want to make a loan in a specific location, or on a specific property type, or to a borrower with a particular credit profile. CMBS creates a new borrowing option and additional opportunities for property owners. A bank that might say no to a loan it keeps on its balance sheet can instead originate the loan and then funnel it into the CMBS market.

CMBS adds transparency to mortgage markets

Because CMBS trade frequently, their values are transparent. As a result, these securities are an important pricing mechanism. Even lenders who originate commercial real estate loans to keep on their balance sheets look to the CMBS market to price loans.


Terms are inflexible

CMBS borrowers have little flexibility to respond to routine changes in their business, such as the loss of an important tenant. Say, for instance, that a borrower finances a property via a CMBS and then, two years later, loses a key tenant. To market the property to a replacement tenant, the owner must invest a significant sum in tenant improvements. CMBS gives the borrower no flexibility to repay the original loan and get a new loan to finance the unexpected expense.

CMBS rules remain rigid even in a crisis

At the beginning to the Covid-19 pandemic, many property owners faced difficult times – lockdowns, closed shopping centers, office buildings and hotels, and tenants struggled to pay rent. Property owners with traditional bank loans could negotiate with their lenders for concessions such as reduced rent or temporary forbearance. CMBS borrowers had no such flexibility – they owed their monthly payments, regardless of what else was going on in the global economy. Eventually, CMBS investors did allow some limited relief to borrowers affected by the pandemic, but the terms were not as broad as those granted elsewhere in the economy.

Prepayment penalties

CMBS loans stipulate prepayment penalties. In other words, borrowers are penalized for paying off loans early. These penalties are designed to protect investors, but they are a disadvantage to borrowers. CMBS loans typically impose prepayment penalties that can be 1% to 3% of the amount of the loan. But loans typically can be defeased, a process – generally costly – through which a loan’s collateral is replaced with government securities.

CMBS valuations can be problematic

The portfolio of mortgages in a CMBS can encompass a number of loans of varying terms, values and property types. An apartment building and an industrial property might be packaged into the same CMBS instrument, for instance.


CMBS are a major financing instrument for the commercial real estate industry. Individual investors typically do not have any direct contact with CMBS though the impact on them can be significant. During good times, an investment made with a sponsor who has used CMBS to finance their deals will enjoy lower debt servicing costs, but in the event of default a sponsor can find the CMBS environment considerably less forgiving than a direct loan with a bank, leaving their investors more heavily exposed to the risk of foreclosure.

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