Skip to main content

Office REITs have continued to sell off in recent weeks, coinciding with news that metropolitan office property sales have slowed to a trickle. Moreover, the buildings that can be sold are increasingly being offloaded at steep discounts. Delinquency rates remain relatively low, but ticked up in Q1, as occupancy continues to be subdued.

With another potential rate hike still on the table at the Federal Reserve, properties carrying adjustable-rate mortgages remain vulnerable to considerable interest rate risk. Meanwhile, hundreds of US banks exceed regulatory limits on exposure to commercial real estate and construction loans.

Related ETFs: iShares CMBS ETF (CMBS), ProShares Short Real Estate (REK), Financial Select Sector SPDR Fund (XLF), SPDR S&P Regional Banking ETF (KRE)

Office real estate investments trusts (REITs) were trading at their lowest level since 2009 last week, as the S&P Composite 1500 Office REITs index has declined by as much as -27% in 2023. REITs focused on commercial real estate (CRE) have broadly underperformed this year, but office properties have been the hardest-hit subset of the commercial property market. Office towers lost nearly 20 million square feet of leases in the first quarter of 2023, according to real estate brokerage JLL. Forbes adds that a record 962 million square feet of office space is vacant in the United States – equivalent to 20.2% of the country’s entire stock.

As MRP highlighted earlier this month, CRE prices experienced their first quarterly decline since 2011 in Q1. Moody’s data showed that the drop was equivalent to less than -1%, but Mark Zandi, Moody’s Analytics chief economist, told Bloomberg that “Lots more price declines are coming.” That prediction appears likely to come true, as property owners have been offloading buildings at significant discounts…

To read the complete Intelligence Briefing, current All-Access clients, SIGN IN

All-Access clients receive the full-spectrum of MRP’s research, including daily investment insights and unlimited use of our online research archive. For a free trial of MRP’s All-Access membership, or to save 50% on your first year by signing up now, CLICK HERE