Investors specializing in short selling, or betting against a stock, are flocking to mortgage REITs, in anticipation of further defaults of mortgages associated with office properties that will drive stock values down for those REITs.

Short interest in Blackstone Mortgage Trust is up from 5% of outstanding shares at the beginning of 2023 to about 14% recently, Bloomberg reports, citing S&P data. Likewise, short interest in Starwood Property Trust surged from 3.5% to 14% over the same period. Both of those entities have significant holdings of mortgages associated with office assets.

A short seller's strategy is to sell borrowed stock, and then buy it back when its price has dropped, pocketing the difference. An increase in the amount of outstanding stock shorted by investors tends to indicate that more investors believe that a stock is on the way down.

Delinquency rates for all commercial property mortgages are edging up in today's economic climate, according to the Mortgage Bankers Association, with 2.2% of such loans 30 days or more late at the end of Q1 2023, up from 2% the previous quarter.

Specifically, the rise was led by a 110-basis-point increase in the percentage of office loans that are past due 30 days or more, the organization reports, from 1.6% at the end of Q4 2022 to 2.7% at the end of Q1 2023.