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.
Source: mpamag.com