(Bloomberg) — Sales of commercial mortgage bonds have fallen off a cliff, plummeting about 85% year-over-year, as rising interest rates cut into lending volume and defaults spook investors.
Only about $4.27 billion of the bonds have been issued so far this year, down from $29.38 billion at this same point last year, according to data compiled by Bloomberg based on deals without government backing. Investors blame the Federal Reserve’s aggressive interest rate campaign, which has made it more expensive for borrowers to refinance. Higher rates have also cut into sales of properties by effectively lifting prices for buyers.
Adding pressure is a recent string of defaults in the office and retail property sectors, making bond buyers even more wary. This week, Bloomberg reported that Brookfield Corp., parent of the largest office landlord in downtown Los Angeles, defaulted on loans tied to two buildings instead of refinancing the debt as demand for space falls. Meanwhile, a loan tied to former President Donald Trump’s tower at 40 Wall St. in Manhattan was placed on a lender watchlist. And investors are trying to foreclose on one of the country’s largest malls — the Palisades Center in West Nyack, New York.
“Default risk has increased and could be more problematic if rates increase and the economy slows,” said Chris Sullivan, chief investment officer at United Nations Federal Credit Union. “So, I think a cautious and especially diligent approach is appropriate.”
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The drop in lending volume follows a slowdown in real estate market activity, starting in the latter half of 2022 as the Fed began ramping up rates in earnest.
Last year saw a 10% drop in commercial real estate loans — the underlying debt that typically gets repackaged into commercial mortgage bonds — compared to the year before,