Bonds backed by commercial real estate mortgages have not done well lately. Many investors fear the current office vacancies and refinancing difficulties.
NEW YORK – Commercial-mortgage-backed securities (CMBS), a small corner of the U.S. bond market, dropped significantly over the past year due to fears that owners of business parks, high-rises and other office properties may default on loans extended during a time when work habits have changed and financing costs present challenges.
That stress deepened after Silicon Valley Bank’s collapse because it raised concerns that regional banks could scale back their risk-taking and be more reluctant to make commercial real-estate loans. That, in turn, would make it harder for commercial property owners to refinance existing debt.
“At a bank, you don’t really know what’s going on with the commercial real estate,” says Alan Todd, head of U.S. CMBS strategy at BofA Global Research. CMBS, he added, is providing “a more real-time reflection of the credit risk embedded in some of these loans.”
The delinquency rate for loans underlying commercial mortgage securities was 3.09% in March, according to the data firm Trepp Inc. – less than half the rate from two years earlier.
Delinquencies have risen fairly steadily since the middle of 2022 in the category that most concerns investors: offices. And there is wide agreement on Wall Street that delinquencies and defaults should continue to climb going forward, due in large part to soaring office vacancies in many cities.
In downtown areas, the office vacancy rate reached 17.6% in the last three months of 2022, up from 13.8% two years earlier.
Source: Wall Street Journal (04/06/23) Goldfarb, Sam
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