Commercial Mortgage Backed Securities (CMBS)

Commercial Mortgage Backed Securites (CMBS) have not yet received enough attention amidst the bailout mania of the moment that is focused entirely on the financial institutions and residential real estate. However, that will change in 2009 as the macro-deleveraging process continues. The time has come for the commercial real estate market to be exposed for the excesses over the past five years. CMBS will be the CDS (Credit Default Swaps) and Sub-prime Mortgages of 2008.

Approximately $380 billion in commercial real estate are up for renewal/refinance/payoff during 2009. Financial institutions are holding over $1.2 trillion in commercial real estate. And unfortunately, we are just now hitting our stride in terms of the inevitable down cycle of commercial real estate. The "Contrary Investor" states that the commercial real estate cycle has followed the residential real estate cycle with an approximate 18-24 month time-lag period.

Many of the commercial real estate loans up for renewal were financed at incredibly high valuations (wasn't everything over the past five years) relative to now deteriorating per square footage rental rate prospects. The reason for the drop in the per square footage rental rates is the commercial real estate property vacancy rates are rising dramatically.

How does one take advantage of the potential CMBS debacle? My vehicle (stock) of choice is SRS, which is ProShares Ultra-Short Real Estate ETF. This vehicle rises as the value of real estate declines and, of course, vice-a-versa. It closed yesterday at $60.35. A chart of SRS is as follows: