Background
Signs of stress in the commercial property market are growing because of the rise of remote work, the Federal Reserve’s interest rate hikes and the crisis facing small and midsize banks. All of these factors have analysts concerned about a wave of foreclosures.
The widening in the options adjusted spread on BBB-rated U.S. commercial mortgage-backed securities accelerated in March after office vacancy rates surged. As of year-end 2022, the vacancies in U.S. metro areas were the highest on record, at 18.7%. Downtown offices in some metros face higher delinquency rates, with landlords struggling as businesses hesitate to renew leases.
Meanwhile, borrowers are preparing for the nearly $1.5 trillion of U.S. commercial real estate debt due for repayment before 2026. Refinancing debt has become more expensive after this year’s domino collapse of regional banks, and the ripple effects could be felt for years.
The issue
Commercial real estate is an investment class reliant on leverage, and falling asset values can lead to a heightened risk of defaults. Market conditions have hurt value. According to a Bloomberg analysis by Jeffrey S. Langbaum, U.S. office values could decline by more than 20% in 2023 due to higher debt costs and reduced liquidity.
Commercial properties in the U.S. are facing yet another challenge in the form of refinancing debt. Blackstone Inc.’s $70 billion real estate trust for wealthy individuals, for example, faced higher withdrawal requests in March and restricted redemptions for a fifth month. Shadow lenders aim to bridge the gaps created as traditional banks and the bond market withdraw from commercial real estate.
Tracking
Use Bloomberg’s GP, CRE, MTGS and LDES functions to analyze the CMBS market. Run NSUB FFMSTORY to sign up for more functions-based stories.
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