Like most advisors, you have likely explored a range of alternative asset classes to identify investment strategies that can help you reduce the impacts of rising rates, persistent inflation, and volatile markets on your clients’ portfolios. Commercial real estate (CRE) credit is an asset class you may not know about. What is CRE credit?
CRE credit is a loan or security backed by income-producing property. CRE credit is also known as a commercial mortgage, which is a first mortgage lien secured by a commercial real estate asset. CRE credit investments are generally comprised of diversified portfolios of CRE mortgages.
In commercial real estate, five core property types make up most of the commercial mortgage market in the United States: multifamily, office, retail, hospitality, and industrial. U.S. commercial mortgages across these property types and others support a debt capital market of over $4 trillion1.
CRE Credit’s Position in the Capital Stack
First-lien mortgages hold the most senior position in the typical financing structure of a CRE investment. A priority claim secures the mortgage against the property. They are first above second-lien mortgages, mezzanine loans, and all equity positions and afford priority to foreclosure proceeds should the borrower default.
Market Outlook for CRE Credit
With increased investor demand over the years for alternative investments, CRE credit has become more accessible to retail investors. CRE credit, particularly in the form of first mortgage loans, is not a traded asset class.
As a result, volatility in the public markets has minimal impact on the value of the loans on a day-to-day basis. CRE credit exposure may reduce fluctuations in the value of an investment portfolio, providing the potential for enhanced stability in times of market disruption.
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