Commercial real estate has been in a bad spot for a while now, for a variety of reasons, including the effects of the pandemic and working from home. But now there are very bad signs of how deep the hole is. For the first time since the financial crisis, investors in the highest-rated bonds backed by commercial real estate debt are suffering losses. Buyers of the AAA portion of a $308 million bond backed by the mortgage of a building in midtown Manhattan got back less than three-quarters of their original investment because the loan was sold at a deep discount. It's the first loss in the post-crisis era, according to Barclays. So what happened to the five junior creditor groups? They were wiped out. Market watchers say the fact that the pain is reaching the top-ranked creditors, and that overwhelming safeguards are being put in place to ensure they are repaid in full, is a testament to how badly some in the U.S. commercial real estate market are struggling. “These losses could be a sign that the commercial real estate market is starting to bottom out,” warns Leah Overby, a strategist at Barclays.
Meanwhile, Starwood Real Estate Income Trust is taking the drastic step of imposing strict limits on investors’ ability to withdraw money from a $10 billion fund managed by Barry Sternlicht’s Starwood Capital Group.The move is the latest sign that a long period of high interest rates is causing cracks in the commercial real estate market.Rivals such as SREIT and Blackstone Real Estate Income Trust faced mounting pressure in the second half of 2022 as investors began demanding more of their money back.