Interest rates have risen— that’s a well-known fact.  Rising rates harm everyday consumers, from credit cards and student loans to mortgages.  Coupled with post-pandemic workplace trends favoring remote work, increased borrowing costs also wreak havoc on the commercial real estate market.

Keen-eyed Leadership Matrix readers may recall that the post-pandemic remote work trend is also a nationwide concern for commercial corridors in city and town centers.  Municipal leaders are still grappling with that issue, with varying degrees of success, especially with some resilience in residential-commercial corridors.

Real estate investors face the prospect of refinancing loans coming due at significantly higher rates than when the loans were first issued, often at a time when many tenants are looking to shed space.  This phenomenon also affects a financing tool previously considered a relatively safe investment: Single-Asset, Single-Borrower (SASB) bonds.

What are SASB bonds?

SASB bonds are commercial mortgage-backed security that often securitizes a single loan, usually exceeding $200 million (and going as high as $1 billion+), on a single, high-value property or a large group of properties.  These bonds are attractive to investors due to their typically high credit ratings and the perceived stability of the underlying assets, which often include prime office buildings, hotels, and shopping centers.  Investors include banks, insurers, pensions, mutual funds, and the broader commercial real estate market.  Credit agencies gave these bonds mostly AAA ratings, as high as U.S. Treasury bonds(!).  These dynamics are making potential losses particularly jarring for investors.

The negative economic consequences of defaults are real.  Consider this.

There are about $260 billion of SASB bond deals.  Most of the debt is coming due at a time when the refinancing market is frozen for commercial and retail real estate owners.  Some have defaulted before their due dates because interest expenses soared after the Federal Reserve raised rates.  Loans at or near default have nearly tripled in the last two years.

Many of the largest lenders are highly regulated banks and insurers, which may be reluctant to invest in future deals, thus slowing the market further.  Even with commercial real estate dynamics that are muted at best, all hope is not lost!  Consider that opportunity exists in any market for those well-positioned to capitalize on the downturn.  See below for a commercial real estate outlook for the year that touches upon some market prospects.

What are your thoughts on the commercial real estate market?  How are commercial corridors faring where you live?  Reach out to let me know by clicking here!

~ Brian Kasal- The Leadership Matrix

Click here- JP Morgan 2024 Commercial Real Estate Outlook

P.S.- Did you see my last Leadership Matrix post?  High Interest Raters Affect Mortgages and Credit Card Bills. How About Innovation?

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