Market turmoil sparks bond defaults
The turmoil in commercial real estate is now affecting what was once considered the safest segment of the market – bonds backed by loans on high-quality properties, the Wall Street Journal reported.
Defaults in single-asset, single-borrower commercial mortgage-backed securities (CMBS), typically viewed as safe investments by bond investors, have sharply increased.
The default rate for these bonds has reached 8.7% in 2024, nearly three times higher than two years ago, according to the Commercial Real Estate Finance Council. Single-asset CMBS bonds are typically considered highly secure, often receiving triple-A ratings from top agencies and comparable to US Treasury bonds.
The defaults have already resulted in losses for some investors. In one high-profile case, debt holders of a AAA-rated building in midtown Manhattan lost over 25% of their original investment after selling the bonds at a significant discount – the first loss of its kind since the 2008 financial crisis.
The situation could worsen as a substantial amount of debt matures. Philadelphia Fed data shows that of the $260 billion in outstanding single-asset, single-borrower debt, $35 billion is due this year, with an additional $154 billion maturing over the next three years.
The commercial real estate sector faces multiple challenges. Work-from-home trends have pushed office vacancy rates to record highs, according to Moody’s data. Additionally, interest rates are expected to remain elevated, potentially causing more distress as $1 trillion of debt in the overall commercial real estate sector approaches maturity by the end of 2024.
Some real estate experts predict that the combination of high rates and weak demand could lead to more defaults and forced property sales at steep discounts, particularly in the office sector. Kroll Bond Rating Agency reports that about $52 billion, or one-third of all office loans packaged into bonds, was in or approaching default in March.
The distress is not limited to high-quality properties. ATTOM, a property analytics firm, reports that commercial real estate foreclosures broadly increased by 117% year-over-year in the first quarter of 2024.
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