If one were to categorize the commercial property market, they might classify it as a private market with infrequent transactions varying sizes that are generally brokered. While it shares some of these characteristics with other large markets, despite its size, it still has less transparency and standardization than many markets of similar size, this is largely a result of the idiosyncrasies that exist at the individual asset level.

Access to Markets:

Size:

Hold Time:

The Takeaway:

While the above makes a comparison between the markets of other assets, it is only looking at the commercial property at the ‘property level.’

Similar to many other “real assets” (e.g., single-family home, car, or airplanes), the financing of commercial property can be thought of as being multiple “levels”. For example, at the base level, you have your commercial property – the physical structure (brick and mortar) and the dirt it sits on. Next, this commercial property can receive financing (e.g., in the form of debt or mortgage); this layer can be thought of as the second level or the loan level.

Next, because the loan or mortgage level contracts can be used as collateral for another financial instrument such as a commercial mortgage backed security (CMBS) or a commercial real estate collateralized loan obligation (CRE CLO), these more complicated structures can be thought of as the third level – or the bond level. At each level, the stakeholders use different metrics to assess the risks and performance of their positions and exposures, however each “higher” level is dependent on the lower levels. For example, the property performance will always affect the loan or mortgage performance, and loan/mortgage performance affect the bond performance. However, the opposite is generally not true – bond performance does not impact the loan performance, and loan performance does not affect the property performance. While commercial property transactions generally take place at the property-level, the implications of the transaction can be felt across all levels.