Commercial Real Estate Debt Market in Crisis

CMBS issuance drop puts commercial real estate market under pressure, stressing regional banks and potentially leading to a 50% drop in property prices.

Commercial Real Estate Debt Market in Crisis

CMBS issuance drop puts commercial real estate market under pressure, stressing regional banks and potentially leading to a 50% drop in property prices.

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Good morning. Commercial real estate is under pressure as CMBS issuance drops by 83%, causing stress for regional banks and potentially leading to a 50% drop in property prices. Meanwhile, Jacob Garlick is being sued over his winning $190 million bid for the Flatiron Building, with owners claiming fraud due to a lack of funds for the $19 million deposit.

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Commercial Real-Estate’s Debt Machine Is Broken Down

Despite the value of higher-quality commercial mortgage bonds, the commercial real estate market faces pressure as the issuance of CMBS drops by 83%, causing stress at regional banks and a potential 50% drop in property prices.

Market plummet: The issuance of commercial mortgage-backed securities (CMBS), which are bonds sold by Wall Street banks to finance commercial buildings, has plummeted by 83% to $9 billion this year, according to Deutsche Bank research. This drop has been attributed to the rising interest rates and falling property values, which have negatively impacted the outlook for borrowers. Approximately $2 trillion of debt is estimated to be coming due through 2024.

Sector impact: The commercial property market, estimated to be worth $20.7 trillion, has been hit hard by the decline in CMBS issuance. Although these bonds only finance around 11% of the market, they have served as a visible gauge of the financial health of income-producing real estate such as hotels, office buildings, apartment buildings, and shopping malls. The lack of financing has put pressure on valuations, which has caused a stand-off between borrowers and lenders.

Stress at regional banks: Which are heavily exposed to commercial real estate, has also added to market angst. This was highlighted by the failure of Silicon Valley Bank in March. Shares of the SPDR S&P Regional Banking ETF were down about 35% on the year through Friday, according to FactSet. Some experts worry about continued fallout at regional banks, especially without regulators approving some form of a temporary and limited government backstop for deposits on accounts used by businesses to cover payroll and for working capital.


Big picture: Experts predict a potential 50% drop in property prices in the commercial real estate market, with office properties in San Francisco facing significant downside risk; however, higher-quality commercial mortgage bonds will retain value, and not all sectors will suffer. The price discovery process may be prolonged, with banks and thrifts working on issues behind closed doors.

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Flatiron Building Owners Sue Garlick Over Fraudulent Bid

Jacob Garlick is being sued by the man he outbid after winning a $190 million bid for the iconic Flatiron Building, with its majority owners claiming that the bid was fraudulent and he never had the money for the $19 million deposit.

Lawsuit: The suit alleges that Garlick defaulted on a contract that required a 10% down payment within two days and also provides more details on the events that followed the auction, when Garlick's attorneys repeatedly assured the building's owners that he had the money to close the deal.

Sequence of events: The suit alleges that Garlick defaulted on a contract that required a 10% down payment within two days. After the auction, Garlick's attorneys made repeated assurances that he had the money to close the deal, but the money never appeared. Garlick sought a one-day extension, promising that the money would be wired to the referee, but the Gural group said Garlick first needed to prove he had the funds to begin with.


The auction for the Flatiron Building is now set for May 23rd, with the added twist that the winning bidder must put down a mere $100,000 deposit on the spot. This stipulation has fueled speculation that Jacob Garlick, notorious for his previous bidding blunder, might take another shot at the iconic property.

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📰 Daily Picks
  • Credit strategy: TPG Inc. is in talks to acquire real estate firm Angelo Gordon for $2bn, as it seeks to boost its credit investing portfolio. The potential deal would add to TPG's current $135bn of AUM and Angelo Gordon's $53bn of assets, primarily focused on credit and real estate.

  • Flight to safety: Real estate stocks outperformed the broader market last Thursday, rising 0.9%, as investors sought a safe haven amid renewed concerns about regional banks and lower bond yields.

  • “Bordering on idiotic”: On Starwood's Q1 earnings call, Barry Sternlicht criticized the Fed’s recent interest rate hike and blamed the government's "stupidity" for causing a crisis among regional banks.

  • Deal of the day: Armada Hoffler Properties has bought the first phase of SJC Ventures' West Midtown development, The Interlock, for $215M in an off-market deal, which the buyer considers a discount. The deal includes 311K SF of commercial space.

  • Crown Estate: As King Charles III inherits the £15.6 billion commercial portfolio, his approach to managing it as the reigning monarch will be vital. Here’s a look at how and when the portfolio was assembled.

  • Leasing record: Macerich, a major mall landlord in the US, announced a surge in leasing at the start of the year, despite worries about a recession and higher interest rates.

  • Steep declines: Colliers' executives forecast that the decline in sales and financing will persist through 2023 due to concerns about limited debt availability and property valuations. The firm reported a 3% revenue drop to $966M in Q1, including a 9% fall in the Americas.

  • Property appraisals: DFW's property tax assessments have arrived, and commercial valuations in Dallas County have surged by nearly 30% since last year. Hotels experienced the largest valuation spike, increasing by an average of 53%, followed by a 35% increase for apartments.

  • Deal volume drops: CBRE Group Inc.'s "Q1 2023 U.S. Capital Markets Figures" report reveals a 57% YoY drop to $78bn in the US commercial real estate investment for Q1. Single-asset sales fell 55% YoY to $58bn, while entity-level sales dropped 40% YoY to $9bn.

  • Vacancy crisis: Manhattan's office vacancy rate matched its highest level since 2000 at 17.4% in Q1 2023, while 94 MSF of office space is available for lease. This represents a growth of over 70% since the start of the pandemic, and across Manhattan, empty work space is greater than in all of Houston and Dallas-Fort Worth combined.

  • Life and legacy: John Cushman III, the grandson of the founder of Cushman & Wakefield and its former chairman, passed away last Thursday at the age of 82. He was renowned for negotiating significant deals, including a 4 MSF lease for Merrill Lynch's global headquarters and Boeing's relocation from Seattle to Chicago.

📈 Chart of the Day

Office Sector Leads Biggest Discount List in US Equity REITs, NAV Monitor Finds

US equity REITs traded at a median 20.8% discount to consensus NAV estimates as of May 1, slightly higher than the 20.2% recorded in March. The office sector had the biggest discount at 57.9%, with 8 out of the 10 largest discounted REITs being office REITs.

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