If CMBS short investors made a windfall from the pandemic, should CMBS holders get a bailout?

On Monday, the New York Times reported on investors who had shorted commercial real estate loans – that is, they had bet big against holders of commercial real estate debt, primarily in the retail sector.

How big has the payoff been? One major investor made $1.3 billion on this wager since October.

The successful short was realized amidst the economic turbulence of the pandemic, which sent shopping malls and other retail real estate into a dive; data company Trepp stated that so far this year, 16 percent of all retail industry loans are delinquent.

But similar troubles plague the lodging industry – a report compiled by Trepp and promoted by the AHLA showed that 23.4% of hotel industry CMBS loans were delinquent more than 30 days as of July. Our own analysis shows that hotel CMBS debt is a creature of big investors like REITs and private equity companies.

The news that investors foresaw CMBS declines even before the pandemic should give pause to legislators contemplating a CMBS bailout. According to the article, “Brick-and-mortar retail has been in distress for years.”

“…’It’s an absolute perfect storm, unfortunately, for the commercial real estate market,’ Mr. Burg said. ‘We see very little that the Fed or government can possibly do to prop this up when there’s so much excess supply.’”

Why should taxpayer money go to support real estate loans in the retail industry if there were doubts before the pandemic? Or if billionaire investors have already profited from their distress? Or if bailout funds would largely accrue to sophisticated real estate investors in the hotel industry?

Read the New York Times article here.