Fidelity expert: "CMBS Challenges & Opportunity: Are CMBS Securities Mispriced?"

By some measures, commercial mortage-backed securities (CMBS) are in good shape, according to Mark Snyderman, portfolio manager and CMBS group leader, Fidelity Investments, who presented on “CMBS Challenges & Opportunity: Are CMBS Securities Mispriced?” to the Boston Security Analysts Society on May 5. Still, he answered “No” to the big question posed by his title.

Good news: New construction and cash flow growth
Commercial property is not overbuilt, said Snyderman. In fact, in recent years, new construction has lagged the 2% growth rate needed to keep up with population growth and replacement of obsolete buildings. So, commercial property rents and occupancy should fare relatively well.

Commercial property growth has fallen from its peak. But even in 2009, Snyderman expects it will be flat or perhaps down by single digits. So, cash flow isn’t much of a problem.

Problem: Lack of debt financing to squeeze mortgage borrowers
CMBS delinquency rates could rise to roughly 20 times their current level, which is below 2%, said Snyderman. Commercial real estate is suffering as debt financing becomes less available for highly leveraged properties purchased at historically high valuations. The disappearance of cheap debt financing and concerns about cash flow growth suggest that CMBS delinquencies will increase dramatically.

Pessimism will create opportunities
Investors must approach CMBS cautiously, said Snyderman. They can’t rely on ratings because the ratings agencies haven’t adequately reformed themselves. Instead, investors must do old-fashioned, bottom-up credit analysis on a property-by-property basis. It’s also helpful to consider the “vintage” of a CMBS deal, even though there are deal-by-deal differences. 

Right now, we’re in a wave of market optimism, said Snyderman. But, he predicted, a wave of pessimism will bring attractive opportunities in CMBS.