Ultra-Safe Commercial Real Estate Debt Market Sees Unprecedented Losses
Defaults on high-quality properties are sparking losses for bond investors, a rare phenomenon in the commercial mortgage-backed securities market.
Commercial Real EstateDebt MarketCmbsBond InvestorsMortgage Backed SecuritiesReal EstateJul 17, 2024
This unexpected trend may surprise investors, as single-asset CMBS bonds are often rated triple-A by top rating agencies, with safety often seen on par with US Treasury bonds. However, debt holders of a high-profile AAA-rated building in midtown Manhattan lost more than 25% of their original investment after selling the bonds at a hefty discount, a first since the Great Financial Crisis.
The wave of debt coming due in the commercial real estate sector could further exacerbate the problem. Of the $260 billion of single-asset, single-borrower debt outstanding, $35 billion is approaching maturity this year, followed by $154 billion of maturing debt over the next three years. This could lead to a murky future for commercial real estate, where investors have been watching for signs of trouble since the pandemic.
Work-from-home trends have pushed office vacancy rates to the highest level recorded, according to Moody's data. Interest rates, meanwhile, look poised to stay higher for longer, potentially sparking more distress as $1 trillion of debt in the overall commercial real estate sector approaches maturity by the end of this year. This cocktail of high rates and anemic demand could result in more defaults and forced selling by property owners at heavy discounts.
Office buildings are a particular sore spot, with about $52 billion, or a third of all office loans packaged into bonds, in or approaching default in March. Commercial real estate foreclosures broadly spiked 117% year-over-year in the first quarter, according to data from property analytics firm ATTOM.
Frequently Asked Questions
What type of bonds are typically seen as safe havens by bond investors?
Single-asset, single-borrower commercial mortgage-backed securities (CMBS)
What is the default rate for single-asset, single-borrower bonds?
8.7% so far in 2024, about three times the default rate recorded two years ago
How much debt is approaching maturity in the commercial real estate sector?
$35 billion this year, followed by $154 billion over the next three years
What is the impact of work-from-home trends on office vacancy rates?
Office vacancy rates have been pushed to the highest level recorded
How much has commercial real estate foreclosures increased year-over-year?
117% in the first quarter
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