The issuance of commercial mortgage bonds has taken a sizable hit as buyers and lenders react to the fallout of rising interest rates.

New data compiled by Bloomberg found that only $4.3B worth of CMBS bonds have been issued so far this year, an 85% drop from the $29.4B issued at the same point last year.

The decline in lending volume comes as the Federal Reserve’s battle to tamp down inflation has put a serious dent in the purchase and refinancing of commercial properties.

Investors say a recent string of defaults, particularly on office and retail loans, is making matters worse.

Earlier this month, GFP Real Estate defaulted on a $103M loan it owes on an office tower in New York. A few days later, $784M worth of loans on two Downtown Los Angeles office buildings owned by Brookfield also went into default.

“It’s very hard to bring new deals to market now, because there’s nothing happening in the real estate market,” Paul Norris, head of structured products at insurance asset manager Conning & Co., told Bloomberg. “No one wants to refinance their buildings, and there’s a massive gap in terms of expectations between buyers and sellers due to the uncertainty.”

The number of commercial loans that can be securitized and sold in the form of CMBS bonds has been on the decline since 2022 when volume dropped 10% year-over-year. The Mortgage Bankers Association expects another 15% slowdown in 2023, according to Bloomberg.

“Everything is frozen, so there’s no raw material to make CMBS transactions,” Norris told Bloomberg.

Experts say things could get worse before they get better, and sellers should adjust expectations accordingly. Commercial property prices fell by 13% in 2022, according to Green Street, and cap rates are on the rise. If the Fed continues to push rates, sellers will be forced to tone down pricing to keep transactions moving.

“The market needs to learn how to function in this new rate regime and reach a consensus of where things should price,” Barclays CMBS strategist Lea Overby told Bloomberg. “The sooner the market realizes this is the new reality, the better.”