A Really Bad Sign for Commercial Real Estate

Commercial real estate has been behind the eight ball for some time now, for all those pandemic-fallout-work-from-home reasons we’ve heard. But now there’s a really bad sign as to how deep the hole goes. For the first time since the financial crisis, investors in top-rated bonds backed by commercial real estate debt are getting hit with losses. Buyers of the AAA portion of a $308 million note backed by the mortgage on a building in midtown Manhattan got back less than three-quarters of their original investment after the loan was sold at a steep discount. It’s the first such loss of the post-crisis era, says Barclays. As for the five groups of lower ranking creditors? They got wiped out. Market watchers say the fact the pain is reaching all the way up to top-ranked holders, overwhelming safeguards put in place to ensure their full repayment, is a testament to how deeply distressed pockets of the US commercial real estate market have become. “These losses,” warns Barclays strategist Lea Overby, “may be a sign that the commercial real estate market is starting to hit rock bottom.”

Over at Starwood Real Estate Income Trust, they’re taking the drastic step of imposing tighter limits on investors’ ability to pull money from the $10 billion fund, which is managed by Barry Sternlicht’s Starwood Capital Group. The move is the latest indication that higher-for-longer interest rates are causing cracks in the commercial-property market. SREIT and competitors including Blackstone Real Estate Income Trust faced rising pressure in the second of half of 2022 when investors began requesting more money back.