(Bloomberg) -- Recovering risk appetite and tightening spreads in the commercial real estate market mean active managers have to work a little harder, according to DoubleLine Capital LP.

The most “draconian” scenarios have been priced out of commercial mortgage-backed securities following the sudden unraveling of Silicon Valley Bank last March, according to DoubleLine portfolio manager Morris Chen. Just over a year later, capital markets are open and even borrowers in still-unpopular industries — such as the office space — have access to credit. 

That’s a dramatically rosier picture than the backdrop a year ago, when the DoubleLine Commercial Real Estate ETF (ticker DCRE) launched into the eye of the storm. Last spring, no matter the location or underlying leases, most office loans were priced as if a three-year extension and a blanket loss of 60% severity was guaranteed, Chen said. Now, as the markets dial back expectations for the “worst possible outcome,” that means that investors need to spend more time finding mispriced opportunities.

“There’s more of this ‘sharpen your pencil’ environment where investors are resetting their expectations,” Chen said in a phone interview. “The shift is the markets getting smarter or more efficient and people are more willing to roll up their sleeves and dig into this. That’s also a very healthy sign, it’s very akin to a stock pickers’ market.”

Spreads on CMBS have tightened more than almost any other type of popular credit, with BBB- rated bonds shaving off nearly 260 basis points over the last year, according to data from Citigroup.  

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That tightening has occurred even as worries linger over commercial real estate amid a murky outlook for office properties and gnawing questions about the health of small and midsize lenders. Despite those concerns, there’s been “incredible” credit availability for CRE borrowers as of late, according to Chen. So far this year $23.5 billion of non-agency CMBS has been issued, or nearly 160% more than at the same time last year, according to data compiled by Bloomberg News as of Tuesday. 

Tightening spreads are good news for the actively managed DCRE, which commands about $130 million. Since the ETF began trading last April, it’s climbed more than 7% on a total return basis, compared to roughly 3% for the fund’s benchmark. 

As the market has moved away from the most-bearish scenarios, DCRE has broadly kept to its founding portfolio setup: short-duration securities with “high probability” outcomes in terms of payoffs, Chen said. 

“Inside of the two-year part of the curve is very interesting. It’s an area where if you want to play offense, you can play offense,” Chen said. “You need to find the right bonds, understand the structure, understand the dynamic in terms of the CMBS market, and that’s what we’re here to do.”

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