The commercial real estate market may serve the same function in the impending financial crisis that residential real estate served in the last one: it will light the fuse. From Wolf Richter at wolfstreet.com:
And it’s structural. Variable-rate CRE mortgages and much higher rates just speed up the process.
After blowing through the pandemic with no more than a squiggle, the delinquency rate of Commercial Mortgage-Backed Securities (CMBS) backed by office properties jumped to 4.5% by loan balance in June, up from 1.6% just six months ago in December 2022, according to Trepp, which tracks and analyses CMBS.
Office mortgages that had been packaged into CMBS went through a horrendous default cycle following the Financial Crisis, with the delinquency rate topping out at over 10% in 2012/2013.
But this current six-month 2.9-percentage-point spike from 1.6% to 4.5% is the fastest six-month spike in Trepp’s data going back to 2000.
So this is going to be interesting because we’re just at the beginning of a massive structural change – not a temporary blip – that is impacting office towers; turns out, companies have figured out they won’t ever need this vast amount of vacant office space.
