Commercial real estate debt

Learn about the potential to generate income and diversify portfolios with CRE debt investments.

Commercial real estate debt

Learn about the potential to generate income and diversify portfolios with CRE debt investments.

Why commercial real estate debt?

Commercial real estate (CRE) debt may provide an alternative source of income and diversification at a time when both are hard to find, while also offering a differentiated way to invest in real estate.

The U.S. CRE market represents a large and diverse investment opportunity totaling over $4.7 trillion and spans across a diverse set of geographies and property types including office, multifamily residential, hospitality, retail and industrial.¹

Significant opportunity

$4.7T+

U.S. commercial real estate debt represents over 50% of the total $8.1T U.S. commercial real estate market¹


Income

Commercial real estate debt has historically provided investors with a differentiated source of income and return with lower volatility than many traditional fixed income asset classes.

Annualized risk and total return (3/31/2000–3/31/2020)

Commercial real estate debt

6%

annualized income return over last 20 years

Past performance is not indicative of future results. The beginning time periods referenced are based on the availability of index data. This data is for illustrative purposes only and is not indicative of any investment. An investment cannot be made directly in an index.

Data from 3/31/2000–3/31/2020. Commercial mortgages are represented by the Giliberto-Levy Commercial Mortgage Performance Index. The Giliberto-Levy Commercial Mortgage Performance Index measures the investment performance of select private-market investments in commercial real estate debt. Commercial mortgages may be subject to default risk. The Bloomberg Barclays U.S. Aggregate Bond Index represents government bonds. The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Government bonds may be subject to default and interest rate risk. Corporate bonds are represented by the ICE BofAML U.S. Corporate Index. The ICE BofAML U.S. Corporate Index tracks the performance of U.S. dollar-denominated investment grade corporate debt publicly issued in the U.S. domestic market. Corporate bonds may be subject to default and interest rate risk. U.S. stocks are represented by the S&P 500 Total Return Index. The S&P 500 Total Return Index is a benchmark of large-cap U.S. equities. The index includes 500 leading companies, captures approximately 80% coverage of available market capitalization and assumes all resulting dividends are automatically reinvested. U.S. stocks may be subject to market risk. Loans are represented by the Credit Suisse Leveraged Loan Index. The Credit Suisse Leveraged Loan Index tracks the investable market of the U.S. dollar-denominated leveraged loan market. Loans may be subject to default risk. High yield municipal bonds are represented by the S&P Municipal Bond High Yield Index. The S&P Municipal Bond High Yield Index consists of bonds in the S&P Municipal Bond Index that are not rated or are rated below investment grade. High yield bonds are represented by the ICE BofAML U.S. High Yield Index. The ICE BofAML U.S. High Yield Index is designed to track the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market. High yield bonds may be subject to a higher default risk than loans. Each asset class is suitable for specific investor objectives, which vary greatly.


Potential to protect principal

Investing in CRE debt may help protect investor principal as lenders are the first to be repaid in the event of a borrower default.


Opportunity for diversification

Investors have traditionally relied on fixed income allocations to complement their stock portfolios. Many diversify their portfolios by investing in assets with negative or low correlation to stocks. CRE debt’s negative correlation to the S&P 500 Index the last 20 years shows it has the potential to diversify traditional portfolios. 

Correlation to S&P 500 (3/31/2000–3/31/2020)²


Investor considerations

Investors should consider key risks of investing in commercial real estate debt. Commercial mortgage loans are typically illiquid and do not have an active secondary market. In addition, while commercial loans are typically secured by a first-priority mortgage on commercial real estate properties, they are still subject to the risk of default by the borrower. There is no assurance that commercial real estate investments will provide regular, stable distributions.


Learn more

Understand the key differences between investing in CRE debt and equity for generating income and diversifying portfolios.

  • U.S. Federal Reserve, Commercial and Multifamily Residential Mortgages debt outstanding, as of Q1 2020.

  • Barclays Agg is the Bloomberg Barclays U.S. Aggregate Bond Index. Commercial real estate debt is represented by the Giliberto-Levy Commercial Mortgage Performance Index. Corporate bonds are represented by the ICE BofAML U.S. Corporate Index. Municipal bonds are represented by the S&P Municipal Bond High Yield Index. Loans are represented by the Credit Suisse Leveraged Loan Index. High yield bonds are represented by the ICE BofAML U.S. High Yield Index. Each asset class is suitable for specific investor objectives, which vary greatly.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

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