Defaults are on the rise for a formerly ironclad type of commercial real estate investment vehicle, signaling potential pain to come in a commercial market already battered by a tough capital climate.
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CRE players have long thought of single asset, single borrower bonds, commonly referred to as SASB bonds, as extremely safe investments. Credit-rating firms initially gave many of the bonds AAA ratings, higher than even U.S. Treasury bonds.
But the rate of SASB loans at or near default has almost tripled over two years, hitting 8.7% this year, The Wall Street Journal reports.
There are roughly $260B in SASB bonds that are held by investors such as banks, insurers, pensions and mutual funds. While the average commercial mortgage-backed security is usually made up of a large pool, or “conduit,” of 50 to 100 loans, SASB bonds involve one large loan for a single, high-value property that financial institutions securitize and then sell on the secondary market.
About $133B in SASB bonds are due between 2024 and 2026, according to data collected by the WSJ. Refinancing the loans attached to the bonds is increasingly difficult in the high-interest-rate capital market, particularly for office and retail landlords.
Owners of a bond backed by a Blackstone-owned office building at 1740 Broadway in New York took a loss after the company sold the property in April, the first time the holders of the highest-rated class of bonds in a CMBS loan have taken a hit since the Global Financial Crisis. The investors received 74 cents on the dollar after the building sold for half of its prior value.
With the office market struggling on a national level, more pain is likely on the way.
“We will see some losses for AAA SASBs going forward,” Thomas Taylor, senior CRE and CMBS researcher at Trepp, told Bisnow. “We're not in the business of predicting exactly who, what, when — it's kind of a fool's errand. But the one thing that's undeniable is that there will be some losses.”
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