Downward angle icon Downward angle icon. Creditors of a AAA-rated Manhattan building have lost more than 25% of their original investments, the first such loss since the global financial crisis, Bloomberg reported. Marianne Ayala/Insider Commercial real estate woes are triggering defaults on bonds secured by loans on prime properties. Single-asset, single-borrower CMBS are typically seen as a safe haven for bond investors. The recent stress is a sign that the sector is in serious distress as values fluctuate and loans mature.
The pain in commercial real estate is spreading to the safest parts of the commercial mortgage market, with losses occurring in bonds backed by the highest quality properties.
Defaults on single-asset, single-borrower bonds — commercial mortgage-backed securities tied to a single high-quality property — have surged in recent years, according to data from the Commercial Real Estate Finance Council cited by The Wall Street Journal.
The percentage of bonds that are in or near default has risen to 8.7% so far in 2024, nearly triple the default rate recorded two years ago, according to the industry group.
This may come as a surprise to some investors, because single-asset CMBS bonds are generally considered ultra-safe in the real estate industry: Many of them are rated triple-A by the top rating agencies and are often viewed as being as safe as Treasury bonds.
Defaults have already caused losses for some investors: Creditors of a famous AAA-rated building in Midtown Manhattan lost more than 25% of their original investment after selling bonds at a steep discount, the first such loss since the global financial crisis, Bloomberg reported.
Defaults are also likely to continue to rise in the commercial real estate sector as debt maturities approach. Of the $260 billion in single-asset, single-borrower outstanding debt, $35 billion is coming due this year and $154 billion is coming due over the next three years, according to data from the Federal Reserve Bank of Philadelphia.
The wall of maturing debt signals an uncertain future for commercial real estate, which investors have been watching closely for signs of trouble since the pandemic began. The work-from-home trend has pushed office vacancy rates to record levels, according to Moody's data.
Meanwhile, interest rates are expected to remain elevated for longer, which could cause further distress across the commercial real estate sector, with $1 trillion in debt maturing by the end of the year.
Some real estate experts say the combination of high interest rates and weak demand could lead to increased defaults and forced sales by property owners at steep discounts, with office buildings particularly vulnerable.
About $52 billion in office loans packaged into bonds, or a third of all of them, were in or near default in March, according to data from Kroll Bond Rating Agency cited by Bloomberg.
Commercial property foreclosures jumped 117% in the first quarter compared to the same period last year, according to data from real estate analytics firm ATTOM.