The entire CMBX stack is now plunging at a rate not seen since the Covid crash and before that the Lehman bankruptcy, when those who shorted CMBX made billions.
Vornado, a real estate investment trust stock, is trading at its lowest level since 1996, going from $66 in January 2020 to less than $16 in June 2023 (at the time of writing this article).
Delinquency rates are low for now, but as in the Big Short 1.0, when delinquency rates only reached highs in 2012, delinquency rates rates rise with a lag, when loans reach maturity.
The crisis could thus start to worsen once the loans start to mature. The total CRE market is $11tn, of which $4.5tn is the total outstanding debt.
However, the stress is visible only in the office space while the rest of the CRE market is resilient.
Morgan Stanley estimates that around $45bn of commercial mortgage-backed securities will mature by the end 2023, where office space REITs count for a debt maturity of around $5bn.
In their opinion, the office defaults should peak somewhere in 2024-25, considering the lag of Covid and the tight monetary policy/higher interest rates.
Meanwhile, the option adjusted spreads on commercial mortgage-backed securities BBB have started to blow up.
Widening option adjusted spreads indicate an increase in perceived risk, signalling concerns about the creditworthiness of tenants, vacancy rates, and potential declines in property values.
Investors and lenders closely monitor option adjusted spreads as they reflect market sentiment and influence financing terms for office property acquisitions and refinancing.
The impact of Big Short 3.0 on the financial industry
Banks are often heavily involved in commercial real estate financing, including providing loans for office building acquisitions, construction projects, and refinancing.
Banks have the highest exposure to US commercial property debt, holding around 39 per cent of the $4.5tn. As the office real estate market faces challenges, banks may experience several risks and vulnerabilities.
Declining property values and increasing vacancies can lead to a decrease in the collateral value of loans secured by office properties.
This can result in higher loan delinquencies, defaults, and potential losses for banks.
Non-performing loans and foreclosures in the office real estate sector can adversely affect banks' asset quality, profitability, and capital adequacy ratios, potentially undermining their financial stability.
Small regional banks are more exposed to the CRE risks as they are heavily concentrating their lending towards real estate loans, while the larger banks have diversified their loan books.
On top of it, smaller banks surprisingly have around 67 per cent of their total real estate loan exposure to CRE, while 33 per cent is towards residential real estate, according to Marquee Finance.
