Chapter 16 Commercial Mortgage-Backed Securities

Joseph F. DeMichele

Vice President Delaware Investments

William J. Adams, CFA

Vice President Massachusetts Financial Services

Duane C. Hewlett

Vice President Delaware Investments

Commercial mortgage-backed securities (CMBS) are collateralized by loans on income-producing properties. The CMBS market has grown dramatically from its modest beginnings in the mid-1980s. Issuance, liquidity, and the number of investors participating in the CMBS market have all increased substantially. This chapter gives a brief overview of the history and composition of the CMBS market. It also provides an introduction to the risks involving structure, optionality, and credit quality of CMBS that investors must be aware of when allocating assets to this market sector.


During the 1980s, a strong economy, the deregulation of the financial services industry, and preferential tax treatment led to an explosion in the level of capital flows into the commercial real estate markets. Total commercial debt outstanding grew from over $400 billion in 1982 to approximately $1 trillion by 1990. Inevitably, extreme overbuilding caused the bubble to burst, and the boom of the 1980s was followed by a severe recession in the commercial property markets during the early 1990s. From 1990 to 1993, returns on income-producing properties fell by 28% as reported in the NCREIF Property Index.1

During the 1980s, the primary sources of commercial real estate funding ...

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