Subprime Redux: Commercial Real Estate Bond Distress Hits Another Record High

Commercial real estate bonds are just commercial real estate loans packaged into securities and sold to investors.

At year-end , they were sporting a 13.8 percent distress rate, eclipsing the prior record of 13.1 percent set at the end of Q3 2024 .

Bondholders have not marked these investments down to their true value.

Realizing losses on bonds reduces net income and balance sheet values for those bondholders.

At approximately $4 trillion , the commercial real estate loan market is the same size as the subprime mortgage market at its peak.

Lenders and bond servicers have also offered many borrowers forbearance, making loan and bond performance appear better than it would otherwise.

As losses on specific bonds are reported, those bondholders book losses on their own income statement.

As these pieces of information become public, that cascading effect ripples out from a particular bond to others.