CMBS – A Complex Sector

BOSTON, MA, April 22, 2024 — Gell-Mann amnesia, a concept attributed to Nobel prize winning physicist Murray Gell-Mann, describes the human tendency to have a more discerning eye towards articles on topics with which one is familiar than articles on unfamiliar topics. In other words, we are more likely to notice the misinterpretations, inconsistencies, and inaccuracies in an article about a topic we know, and more readily accept as true the reporting on a topic that we do not know much about. This phenomenon has stayed in our mind over the last few years during the proliferation of headlines and articles about commercial real estate. As investors in commercial mortgage-backed securities (CMBS), we seek to avoid getting too caught up in daily headlines by evaluating securities on their merits while applying stress scenarios to individual bonds that reflect changes in the market environment.

Opaquely Clear
The nature of the commercial real estate market lends itself well to being broadly familiar but lacking in transparency and therefore subject to broad generalizations. Office buildings, retail stores, apartments, hotels, warehouse/logistics facilities – they are hard to completely avoid interacting with, yet the details of the property are much harder to find. Details such as who is the owner, how long have they owned it, how much did they pay and subsequently invest, do they have debt on the property, what rent is being charged, who are the tenants, when do the leases expire, and so on are typically not readily available.

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