Key Takeaways
- • Marathon Asset Management CEO Bruce Richards, heading a $23B hedge fund, identifies shorting commercial mortgage-backed securities (CMBS) with heavy office exposure as a superior short opportunity compared to saturated mall loan shorts.
- • The CMBX Series 13 index, which carries significant office loan exposure, is now trading at parity with the CMBX Series 6 index (mall-heavy), suggesting market consensus that office and mall loans face equivalent default probabilities—a reversal of decade-long sentiment favoring offices over retail.
- • Mall-focused CMBS shorts have become expensive following successful trades by investors like Carl Icahn; office CMBS derivatives now present a more attractive risk-reward profile for betting against commercial real estate distress.
- • Investors can execute office CMBS shorts through derivative indexes called CMBX, enabling leveraged exposure to underlying office loan deterioration without direct property ownership.
- • The office sector faces structural headwinds drawing parallels to retail's transformation, with strategic observers noting unpredictable technological and workplace disruption factors that could accelerate distress in ways similar to e-commerce's impact on shopping centers.
Summary
Bruce Richards, CEO of the $23 billion Marathon Asset Management, has publicly identified shorting office-backed commercial mortgage securities as an attractive investment opportunity in the current real estate landscape. Speaking to Bloomberg, Richards argued that betting against CMBS bonds secured by office tower loans represents better relative value than existing short positions in mall-exposed securities, which have become prohibitively expensive as prior short thesis have played out successfully.
The strategic opportunity centers on derivative indices called CMBX, which allow investors to take leveraged short positions against CMBS without direct property holdings. Richards specifically highlighted CMBX Series 13—which carries substantial office loan exposure—as a compelling shorting vehicle. Notably, Series 13 is now trading at nearly identical levels to CMBX Series 6, the mall-focused index that generated significant returns for short-sellers including Carl Icahn in recent years. This pricing parity is significant: it indicates the market now ascribes equivalent default probability to office loans and mall loans, reversing a decade of sentiment that favored office assets as structurally superior to struggling retail properties.
The convergence reflects deepening concerns about the U.S. office sector's viability. While acknowledging that offices remain functionally relevant, RealCorp Capital founder Chris Kanwei warned of underappreciated structural risks. Drawing a parallel to Amazon's unforeseeable disruption of shopping centers between 2006 and the present, Kanwei cautioned that investors may be underestimating transformative workplace trends—hybrid work adoption, technological displacement, and changing occupancy patterns—that could render significant office stock economically obsolete with little warning. The analogy suggests that just as observers in 2006 could not predict retail's trajectory, current market participants may similarly misjudge office real estate's medium-term viability.
The shift toward office shorts reflects changing risk calculus in commercial real estate. As mall CMBS shorts became crowded and prices adjusted, the relative attractiveness of office-focused securities increased. Richards emphasized that "more recent vintage securities with heavy office exposure" present the best shorting opportunity, implying that newer loan issuances—likely made at lower underwriting standards during the post-pandemic office boom—now face deteriorating fundamentals. This positioning allows sophisticated investors to profit from what some market participants have termed the office sector's "existential crisis," using structured derivative products to gain leveraged exposure to anticipated loan defaults and CMBS spread widening.
The strategic opportunity centers on derivative indices called CMBX, which allow investors to take leveraged short positions against CMBS without direct property holdings. Richards specifically highlighted CMBX Series 13—which carries substantial office loan exposure—as a compelling shorting vehicle. Notably, Series 13 is now trading at nearly identical levels to CMBX Series 6, the mall-focused index that generated significant returns for short-sellers including Carl Icahn in recent years. This pricing parity is significant: it indicates the market now ascribes equivalent default probability to office loans and mall loans, reversing a decade of sentiment that favored office assets as structurally superior to struggling retail properties.
The convergence reflects deepening concerns about the U.S. office sector's viability. While acknowledging that offices remain functionally relevant, RealCorp Capital founder Chris Kanwei warned of underappreciated structural risks. Drawing a parallel to Amazon's unforeseeable disruption of shopping centers between 2006 and the present, Kanwei cautioned that investors may be underestimating transformative workplace trends—hybrid work adoption, technological displacement, and changing occupancy patterns—that could render significant office stock economically obsolete with little warning. The analogy suggests that just as observers in 2006 could not predict retail's trajectory, current market participants may similarly misjudge office real estate's medium-term viability.
The shift toward office shorts reflects changing risk calculus in commercial real estate. As mall CMBS shorts became crowded and prices adjusted, the relative attractiveness of office-focused securities increased. Richards emphasized that "more recent vintage securities with heavy office exposure" present the best shorting opportunity, implying that newer loan issuances—likely made at lower underwriting standards during the post-pandemic office boom—now face deteriorating fundamentals. This positioning allows sophisticated investors to profit from what some market participants have termed the office sector's "existential crisis," using structured derivative products to gain leveraged exposure to anticipated loan defaults and CMBS spread widening.
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