Overall, we are constructive on commercial mortgage-backed securities (CMBS) fundamentals as the economy continues to reopen. Also, single-asset single-borrower (SASB) CMBS deals allow for more targeted exposure to specific sectors, including the office sector, which at times can offer attractive relative value opportunities to conduit CMBS.
Office REITs also have advantages to offer investors in the current environment. They tend to hold higher-end property portfolios (Class A buildings) and have a diversified tenant base. Many office REITs are involved in property development, which allows them to be more responsive to changes in demand. During the pandemic, several office REITs have increased their focus on the life sciences office sector, which experienced a rapid increase in demand for lab space because of expanding research efforts to combat COVID-19.
“Investing in office space may be more complex than in the past,” said Vanguard senior credit analyst Erick Miller. “This should give active managers with deep fundamental analysis capabilities more opportunities for outperformance.”
This is an abridged version of research published recently by Vanguard Fixed Income Group.