Key Takeaways
- • Marathon Asset Management CEO Bruce Richards, leading a $23B hedge fund, identifies shorting office commercial mortgage-backed securities (CMBS) as a superior risk-reward opportunity compared to the saturated mall CMBS short trade.
- • The CMBX Series 13 index, which carries heavy office loan exposure, is now trading at parity with CMBX Series 6 (mall-focused), signaling the market has repriced office and retail default risk to equivalent levels—a dramatic reversal from the past decade.
- • Short selling CMBS via derivative indexes like CMBX offers institutional investors a structured mechanism to bet against office property loan performance without direct asset ownership; recent-vintage securities with concentrated office exposure are identified as the tactical entry point.
- • Precedent exists for profitable office shorts: Carl Icahn generated substantial returns shorting mall-heavy CMBX indices in prior years, establishing a playbook that asset managers are now adapting to the office sector.
- • The parallel between the decline of shopping centers (accelerated by e-commerce disruption) and current office distress signals structural, not cyclical, headwinds—a cautionary framework for investors evaluating long-term viability of office real estate.
Summary
Marathon Asset Management's $23 billion hedge fund has identified commercial-mortgage-backed securities tied to office properties as the next significant short opportunity in real estate. According to Bruce Richards, the fund's CEO, the economics of shorting mall-focused CMBS have deteriorated due to market saturation, while office securities now present superior risk-adjusted returns. Richards specifically recommended targeting "more recent vintage securities with heavy office exposure" through an interview with Bloomberg, signaling tactical specificity around CMBS selection timing and composition.
The fundamental trade thesis rests on index convergence. CMBX Series 13, the office-focused derivative index, is now trading at approximately the same price level as CMBX Series 6, which carries significant mall loan exposure. This parity is structurally significant: it implies that market participants have equalized default probability expectations between malls and offices—a substantial repricing that represents a complete inversion of risk perception from the previous decade, when retail properties bore disproportionate distress risk. This shift reflects growing institutional concern about the structural durability of office real estate amid hybrid work trends and persistent return-to-office headwinds.
The short strategy leverages existing precedent. Carl Icahn successfully executed profitable shorts against mall-heavy CMBS in recent years, establishing historical proof of concept for the broader short thesis. Richards and other hedge fund managers are now applying that methodology to office properties, using CMBX derivative indices as their execution vehicle. This approach allows institutional investors to establish directional negative positions without acquiring or managing underlying physical assets.
Industry perspectives acknowledge the parallel structural risks facing both retail and office sectors. Chris Kanwei, founder of RealCorp Capital, offered cautionary commentary regarding the difficulty of forecasting long-term viability. He invoked the pre-2008 shopping center boom and the underestimated competitive threat from Amazon's then-nascent e-commerce platform, framing the current office situation as similarly prone to underestimation of disruptive catalysts. The implication is that office obsolescence, like retail's experience, may represent secular rather than cyclical deterioration, making short positions a hedge against structural real estate value destruction rather than cyclical cyclical downturn recovery.
The fundamental trade thesis rests on index convergence. CMBX Series 13, the office-focused derivative index, is now trading at approximately the same price level as CMBX Series 6, which carries significant mall loan exposure. This parity is structurally significant: it implies that market participants have equalized default probability expectations between malls and offices—a substantial repricing that represents a complete inversion of risk perception from the previous decade, when retail properties bore disproportionate distress risk. This shift reflects growing institutional concern about the structural durability of office real estate amid hybrid work trends and persistent return-to-office headwinds.
The short strategy leverages existing precedent. Carl Icahn successfully executed profitable shorts against mall-heavy CMBS in recent years, establishing historical proof of concept for the broader short thesis. Richards and other hedge fund managers are now applying that methodology to office properties, using CMBX derivative indices as their execution vehicle. This approach allows institutional investors to establish directional negative positions without acquiring or managing underlying physical assets.
Industry perspectives acknowledge the parallel structural risks facing both retail and office sectors. Chris Kanwei, founder of RealCorp Capital, offered cautionary commentary regarding the difficulty of forecasting long-term viability. He invoked the pre-2008 shopping center boom and the underestimated competitive threat from Amazon's then-nascent e-commerce platform, framing the current office situation as similarly prone to underestimation of disruptive catalysts. The implication is that office obsolescence, like retail's experience, may represent secular rather than cyclical deterioration, making short positions a hedge against structural real estate value destruction rather than cyclical cyclical downturn recovery.
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