Signs of stress in commercial property

Stress is growing in the commercial property market.

Why it matters: Everyone is watching commercial property, given how reliant it is on some of the same regional banks that have been under pressure since the collapse of Silicon Valley Bank.

Driving the news: One indicator comes from the market for bonds built out of commercial mortgages, known as commercial mortgage-backed securities (CMBS).

How it works: Prices for CMBS — some of which are backed by office buildings that much emptier they used to be — have plunged recently, as investors have started to see them as riskier bets.

• That pushes up CMBS yields (yields move in the opposite direction of their price).
• As those yields rose, the difference between those and yields on super-safe U.S. government bonds has surged.
• That difference is sometimes referred to as a "risk premium," or a "spread."

Be smart: When spreads go up — traders usually say "widen" or "blow out" — it means trading activity is declining, credit is harder to come by and expensive, and the flow of capital through the economy, or in this case the commercial property sector, is starting to slow.

• When spreads really go nuts, as they did early in the COVID crisis and during the financial crisis in 2008, it's the equivalent of a financial heart attack. Sometimes called a "credit crunch," it's when capital stops flowing, and the economy suffers.

The bottom line: These spreads are telling us that worries about the commercial property market are getting more serious.

• "The direction of travel is concerning," wrote analysts with Capital Economics in a note on Wednesday. "We believe there are risks of a credit crunch developing and spreads widening further."