Delinquency Rate In Commercial Mortgage-Backed Securities (CMBS) Surges, How Will It Affect Crypto?

• Delinquency rate in CMBS for offices surged by a full point compared to the trend during the 2008 crisis.
• Bitcoin and other cryptocurrencies will likely have varied responses between the onset of the panic and prolonged bearish pressure in the traditional financial market.

Kobeissi Letter recently revealed a surge in the delinquency rate on Commercial Mortgage-Backed Securities (CMBS) for offices. According to the publication, the figures have spiked by a full percentage point since their peak after the 2008 global financial crisis, from 10.7% to 11.7% in August by 62 basis points (bps).

CMBS are a type of mortgage-backed security. These are backed by commercial and multifamily mortgages instead of residential real estate.

Since December 2022, the delinquency rate in CMBS has risen by over 10 percentage points. Additionally, the data displayed a 71-bp increase in the delinquency rate for multifamily CMBS, translating to a 6.86% bump in the numbers. This is by far its highest climb in nine years.

Overall, the CMBS delinquency rate in the US is up by six bps to 7.29%, its fastest push in around four years. Kobeissi Letter noted that the trend is worse than it was in 2008.

Causes of the Alarming Trend

The higher delinquency rate on CMBS certainly offers a bleak outlook on the commercial real estate market. However, one must Bear

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in mind that the conditions between the 2008 crisis and the current patterns are very different.

The former was due to bad lending practices, which lawmakers and regulators eventually fixed. The condition today is due to a fundamental shift in the demand for commercial spaces due to the introduction of more flexible working conditions post-COVID-19 pandemic.

The transition to online shopping and work-from-home arrangements has significantly reduced the need of businesses for these infrastructures. The bad news, however, is that owners of these buildings now have trouble generating enough income to cover their mortgage payments. This is something that can’t be fixed by existing economic or monetary policies, including interest rate cuts.

Banks that facilitate commercial real estate loans would be the first to bear the brunt of the situation, leading to a reduction in their capital due to writedowns and tighter lending practices. Regional banks could take the worst beating as they have more commercial real estate debt relative to their size.

The resulting negative feedback loop from the rising delinquency rate and weakening balance sheets to tighter lending standards could slow down the economy and drop property prices.

How It Can Affect Crypto

The knee-jerk reaction of investors once the issue blows is usually de-risking. They typically unload speculative or high-risk assets from their portfolio and rotate them into “safe-haven” assets like treasury bonds or gold.

Depending on how the “digital gold” narrative of Bitcoin (BTC) will play out when things hit the fan, it could also serve as an alternative to the mentioned safe-haven assets. However, the current correlation between the premier crypto asset and other top market cap crypto like Ethereum (ETH) and risk-on assets like tech stocks suggests the ensuing market panic will catalyze large-scale liquidations for these digital assets.

On the other hand, the lower entry point for crypto could eventually attract investors looking for an opportunity to accumulate assets in the long term. This behavior would become more apparent if the crisis is prolonged and the people’s trust in the traditional financial system continues to erode. Meanwhile, efforts from the government to ease up on its monetary policy, including interest rate cuts and stimulus packages, could further trigger renewed interest in high-risk assets like tech stocks and crypto, similar to how the trend played out post-COVID-19 pandemic.

All these could ultimately lead to a new price discovery for Bitcoin and crypto.

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