Commercial Real Estate CDOs

Abstract

Collateralized debt obligations backed by commercial real estate (CRE CDOs) have quickly become an important and accepted part of commercial real estate finance. Issuers are drawn to CRE CDOs for efficient financing, and investors are drawn to the diversification benefits. The authors describe CRE CDOs, their evolution, current market trends, and historical performance. CRE CDOs give traditional real estate asset managers the flexibility to take advantage of relative value opportunities within the real estate market, while providing non-recourse financing that matches the average life and interest profile of the underlying asset pool. And as managers are drawn to CRE CDOs for structural flexibility and term financing, investors benefit from exposure to a diverse portfolio of managed CRE assets. As the CDO market continues to develop and evolve, there is an increasing number of managed CRE CDOs and CRE CDOs backed by commercial real estate loans. While this evolution brings new risks to CRE CDOs, it also provides new opportunities for investors. The authors also provide a framework for evaluating CRE CDO investments and discuss how rating agencies rate CRE CDOs.