Property Loan Securities Are the Latest Problem

How reduced office occupancies and other obstacles slam the CMBS market.

Securitized property loans are suffering amid fears about commercial real estate, especially the office sector. The recent troubles of banks, such as collapsed Silicon Valley Bank and stumbling Credit Suisse, have added to the angst.

Issuance of commercial mortgage-backed securities shrank 85% year over year through January, Bloomberg statistics show. And that was before March’s bank turbulence. The slow emergence of retailers from the pandemic and tenant difficulties in downtown office towers have sparked some worrisome developments that analysts fear may be just the start for worse news ahead.

A report from real estate research firm Green Street noted “shock waves” in the CMBS market after the bank woes surfaced, as “investors and traders sharply marked down bond prices,” referring to the mortgage securitizations. Owing to higher interest rates and deepening perceived risk, interest rates on CMBS covering multiple properties have more than doubled since 2021 to 6.3%, per Bank of America.

Asset manager Blackstone spooked investors with its recent default on $562 million of the securities tied to Finnish office buildings and stores owned by Helsinki-based Sponda Oy, Reuters reported. That may seem like a relatively small number, but the development makes investors wonder what other such surprises are lurking.

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Anxieties are most intense when considering offices, where many workers have not returned or done so for just part of the week. Kastle Systems, the office building security provider, said its 10-city occupancy gauge showed only 47.3% of workers in the office, as of March 20.

The hybrid work trend is convincing many commercial tenants that they will not need as much space going forward, and this could slam landlords with weak demand for billions in offices that back property debt coming due in the next few years.

That, in turn, could spawn defaults that would hobble the CMBS that hold those loans. Alan Todd, head of Bank of America Securities’ CMBS strategy, wrote in a client note that office buildings will fall in value and investors had “better get used to it.”

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More Real Estate Woes: Blackstone Hits Exit Limit

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