CMBS Shaken by US Commercial Real Estate Crash... "Worse Than During Lehman"

CMBS Delinquency Rate Triples in One Year

There are assessments that the 'Credit Crunch' drying up the funding for the U.S. commercial real estate sector could be more severe than during the 2008 global financial crisis.

According to Moody's Analytics on the 20th (local time), the maturity repayment rate of U.S. Commercial Mortgage-Backed Securities (CMBS) stood at 33% as of the end of the third quarter this year. This is significantly lower than the 47% recorded during the 2009 financial crisis. The Wall Street Journal (WSJ) noted, "The credit crunch in the commercial real estate sector is intensifying," adding, "Judging by the CMBS maturity repayment rate alone, the situation has worsened compared to the 2008-2009 global financial crisis."

Global real estate services firm JLL evaluated that banks are tightening loans to reduce exposure risks in commercial real estate, and a vicious cycle has begun where commercial real estate, struggling with refinancing upon maturity, is being forced into sales or experiencing sharp price drops. Michael Gillioti, co-head of JLL's New York office, said, "With both new loans and refinancing becoming difficult, and real estate prices continuing to fall, breaking this vicious cycle has become challenging."

According to U.S. real estate information company Trepp, the CMBS delinquency rate surged nearly threefold to 5.75% as of the end of the third quarter over the past year. Although still lower than the over 10% rate during the financial crisis, concerns about loan defaults are growing. Just as the subprime mortgage defaults that triggered the 2008 financial crisis spread to the banking system through derivatives, the rising CMBS delinquency rate increases the risk of underlying loans becoming non-performing. Moody's estimated that nearly half of CMBS experienced defaults as of the end of the third quarter this year.

[Image source=Reuters Yonhap News]

The problem lies in the continuously falling commercial real estate prices. With the prolonged high-interest-rate environment and structural changes such as the establishment of remote work culture due to the pandemic, the commercial real estate market is further contracting, and there are even forecasts that prices will find it difficult to recover to historical highs. Kushner Cos, the real estate company of Jared Kushner, former President Donald Trump's son-in-law, purchased an office building in downtown Brooklyn, New York, in 2018 for $640 million (approximately 825.7 billion KRW), but its current market value has dropped to $270 million. This represents a 58% plunge in price over the past five years.

However, some point out that the nature of the crisis is fundamentally different from the 2008 financial crisis caused by residential real estate known as subprime. During the financial crisis, mortgage-backed securities (MBS) and collateralized debt obligations (CDO) were mixed, and large banks bought and sold these products among themselves, rapidly spreading the damage. But in the case of CMBS, even if delinquency rates surge, there are fewer derivative assets, so the damage is expected to be limited to bondholders (investors), WSJ noted.