CMBX 15 has relatively high multi-family exposure and low hotel and retail exposure – share of reference loan balance by property type.
While the specific CMBX series McNamara is shorting is currently unknown, Bloomberg says that "McNamara is using more recent series of the derivatives to bet against bonds tied to lower quality and poorly located offices".
It is a fair guess that Series 15 is his security of focus. Not surprisingly, it is now trading at the lowest level since its inception, just above 75 cents on the dollar.
Bloomberg CMBX 15 BBB
That said, not everyone is convinced that using the derivatives is the best way to bet against offices.
Morgan Stanley’s commercial mortgage-backed securities desk sees the wager on the riskiest tranches as a momentum trade after it reached a “fever pitch of panic and pandemonium in the back half of last week,” wrote trader Kamil Sadik. The CMBX 15 has been falling recently with a BBB gauge hitting an all-time low.
“It may continue to be profitable to set fresh shorts here, but it requires a continuation of momentum and there being someone else selling at the lows to take you out of your position,” Sadik wrote.
The Big Short 3.0 trade started in 2020, the year of Covid-19.
Indeed, the office real estate sector is currently facing significant challenges and undergoing a crisis due to various factors.
One of the primary factors is the widespread adoption of remote work practices, which accelerated during the global Covid-19 pandemic.
With the implementation of remote work policies, many companies experienced successful transitions to decentralised work environments, leading to reduced reliance on traditional office spaces.
As a result, office property values have declined in certain markets, and occupancy rates have dropped significantly.
Many companies have downsized their physical office spaces or opted for flexible work arrangements, such as hot-desking, to reduce costs and accommodate remote work preferences.
This shift has disrupted the demand for traditional office spaces, leading to an oversupply in some areas and subsequently impacting rental income and property values.
Shifting demographics, such as the preferences of younger generations and evolving work-life balance expectations, have influenced the demand for office spaces as well.
Millennials and Gen Z workers often seek workplaces that offer collaborative environments, flexible arrangements, and proximity to amenities.
This has prompted a shift towards modern, tech-enabled office spaces that cater to the changing needs and preferences of the workforce.
Another challenge for CRE is the rise of bond yields, which imply much higher refinancing rates as previous loans mature. According to Morgan Stanley, almost $500bn of loans will come due in 2024, and a total of $2.5tn in debt comes due over the next five years.
