US commercial real estate (CRE) encompasses properties used for commercial purposes, such as office buildings, retail spaces, industrial facilities, multi-family residential units, and shopping centres.
The CRE market plays a vital role in the US economy, supporting more than 7mn jobs and contributing to almost $1tn (£776bn) to the US GDP. It also generates significant tax revenue for local and state governments.
Additionally, the value of CRE assets influences the overall wealth and financial stability of individuals, companies, and institutional investors.
Big Short 2.0
During the US real estate collapse of 2007-08, some prominent investors such as John Paulson and Michael Burry made huge profits by shorting residential mortgage-backed securities or buying ABX index credit default swaps on various subprime residential and commercial mortgage-backed securities.
Their financial success was portrayed by Christian Bale in the 2015 film The Big Short.
A decade on from the financial crisis, a 'Big Short 2.0' was initiated by investors such as Carl Icahn.
At the time, the trade was about shorting securities backed by shopping malls in weaker locations, where stores could close in quick succession, triggering debt defaults.
The Big Short 2.0 was mainly implemented by shorting the CMBX Series 6, a synthetic tradeable index referencing a basket of commercial mortgage-backed securities with substantial exposure to shopping centres – a segment of the real estate market that was already struggling years before the pandemic.
While the trade failed to move for years, it suddenly started to explode in the aftermath of the Covid-19 pandemic, which basically shuttered the economy overnight and led to widespread defaults in shopping centres.
With the rise of e-commerce and changing consumer preferences, which had pummelled all shopping centres to some degree in recent years, shopping centres in less desirable areas faced declining foot traffic and occupancy rates, leading some investors to profitably short these properties.
Some investors recorded huge gains through this trade. Icahn made $1.3bn, while other commercial real estate bears such as Daniel McNamara – then at MP Securitized Credit Partners – gained more than 110 per cent.
Big Short 3.0
While Big Short was about residential properties and Big Short 2.0 about shopping centres, the Big Short 3.0 is mainly about offices.
McNamara, who was very successful in shorting debt linked to shopping centres, is betting on fresh pain in the US commercial property market, and this time he is targeting the office sector.
"We think there’s a lot of room for this thing to fall in the short term. And in the long term, at maturity, they’re going to be worth a lot less," McNamara told Bloomberg in an interview.
According to reports of a recent note from Goldman, the most relevant series when it comes to shorting offices, is Series 15, which has 33 per cent of all loans exposed to the office sector.
