Real Estate Market Struggles Impacting Bond Market

New York, NY, July 17, 2024-"The commercial real-estate meltdown is spilling over into the bond market,” reports the Wall Street Journal.

“Defaults are mounting in a favorite Wall Street mortgage-bond investment, setting off fresh alarms about the future of offices and malls in cities across the U.S. 

“There are about $260 billion of the deals, known as single-asset, single-borrower bonds, held by investors such as banks, insurers, pensions and mutual funds. Landlords, often private-equity firms, used that money to purchase skyscrapers, shopping centers and other properties.

“Much of the debt is coming due and refinancing markets are frozen for many office and retail landlords. Some are defaulting even before their due dates because their interest expenses soared when the Federal Reserve raised rates. 

“These so-called SASB bonds were meant to be ultrasafe, but the rate of loans at or near default has nearly tripled over two years, hitting 8.7% in 2024, according to data from the CRE Finance Council, a trade group.

“The losses are particularly jarring for investors because credit-rating firms initially gave many of the bonds triple-A ratings-higher than even U.S. Treasury bonds. The financial models behind the ratings never forecast property prices falling below the value of the debt. When the pandemic gutted demand for offices, private-equity firms abandoned near-vacant buildings and their debts, leaving bondholders holding the bag.

“Owners of a bond backed by a Blackstone-owned building took a loss after the property was sold in April, the first such impairment ever, according to research by Barclays. The market is headed for more turbulence as more triple-A bonds get hit, analysts say.

“‘There are at least ten other deals likely to take losses,’ said Ed Reardon, a managing director of securitized research at Deutsche Bank. 

“Many worry that investors will be less likely to help landlords refinance maturing mortgages, pushing prices lower still. Hedge funds and other distressed-debt specialists are circling.

“Bonds are getting hit now because debt is coming due on properties that were able to limp along for years. Malls started losing tenants to online shopping over a decade ago. The pandemic drove the shift to working from home. Then the Fed raised interest rates. About half of all SASB bonds will mature by the end of 2028, according to a report by the Federal Reserve Bank of Philadelphia.”