CRE Distress Tracker Hits Decade-High Of $107B

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MSCI’s U.S. distress tracker for Q4 2024 reached $107.0 billion, marking a significant 24.3% jump—or $20.9 billion—from the previous year. This is the biggest annual increase in a decade, though it’s still just over half the peak seen during the Global Financial Crisis. Looking ahead, this figure sets the stage for 2025.

On a positive note, the pace of distress growth has been easing since Q4 2023. In simpler terms, while distress is still rising, it’s doing so more slowly—the rate of acceleration is tapering off. Markets might prefer an instant drop in distress, but this slowdown is a critical and necessary step worth noting.

It’s also worth distinguishing between the total value of distressed assets and their sheer number. While large distressed loans grab attention, they don’t always signal a broader trend. MSCI pointed out that by the end of 2024, the number of distressed properties was only about a quarter of what it was at the height of the GFC.

Breaking it down by sector, office properties led the pack with $51.6 billion in distress—nearly half the total. Retail followed at $21.4 billion, multifamily at $17.1 billion, hotels at $12.7 billion, other categories at $2.6 billion, and industrial at $1.7 billion. Despite ranking third, multifamily was the main force behind the overall distress growth in Q4.

In commercial real estate circles, many have been waiting for distressed property sales to become a major opportunity. MSCI reported that these sales made up 2.5% of last year’s total deal volume—modest but notable as the highest share since 2015. For perspective, that figure hit nearly 18% back in 2010.

Looking at potential distress—issues like tenant struggles or property liquidations—offers another layer. Office properties face $74.7 billion in potential distress, but multifamily tops the list at $108.7 billion, accounting for 34.9% of the total risk pool.

The dynamics differ sharply between office and multifamily. Hybrid work has emptied out many offices, driving up vacancies and leaving owners scrambling to cover costs. Multifamily, on the other hand, isn’t seeing a wave of vacant units—people still need places to live, even if landlords hit rough patches. This contrast could make the distress picture trickier in the months ahead.

 

Source:  GlobeSt.

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What Defines The Best CRE Investments Today?

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Fluctuating interest rates and shifting demand are key in today’s commercial real estate market, according to Integra Realty Resources’ latest trends report. The Viewpoint 2025 survey collected insights from nearly 600 valuation advisors across the U.S. and the Caribbean.

Anthony Graziano, CEO of Integra Realty Resources, emphasized that fundamental value is driven by cash flow, prime locations, and realistic tenant demand, not speculation. He urged investors to focus on effective management and sustainable rent levels for long-term value, especially in markets with strong job growth and favorable migration trends.

Private investors are diversifying into alternatives like senior housing, self-storage, build-to-rent single-family homes, and data centers. Graziano also highlighted that the best real estate investments go beyond returns and create lasting community impact. Mixed-use developments, such as Nashville Yards and Richmond’s Diamond District, are reshaping underutilized spaces and meeting market demand.

Regarding national policy, Graziano noted that President Trump’s “America First” approach favors real estate growth, but could disrupt previous policies. This includes a potential shift in the federal workforce’s office occupancy and a rise in domestic production due to reshoring trends.

Retail success hinges on consumer confidence, with potential impacts from tax policies and trade tariffs. Retail spaces focused on essentials, like grocery-anchored centers, are likely to perform better in economic volatility.

Multifamily properties remain steady, but affordability concerns could affect investment, especially in markets with high inventory. Graziano cautioned investors to remain flexible and focus on markets with strong job growth and steady population increases.

 

Source:  CPE

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Extend-and-Pretend Drives Record Modifications

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The long-term outlook for commercial real estate (CRE) loans, particularly those in the office space sector, seems to be facing mounting challenges.

According to the data from CRED iQ, there’s been notable growth in loan modifications over the past few years, which reflects the ongoing strain on property owners and the broader CRE market. The numbers show a shift, where properties that might have been able to handle their debt a few years ago are now being pushed to restructure their loans due to economic pressures like high interest rates and changing market conditions.

In particular, examples like the Energy Centre in New Orleans and 17 State Street in New York highlight how properties are struggling with refinancing and the pressure to avoid defaults. Even though certain properties still show solid metrics like occupancy and debt service coverage ratios (DSCR), refinancing remains a significant hurdle, especially with the Fed’s rates holding steady for the foreseeable future.

What stands out from the article is the potential domino effect caused by the combination of tighter lending conditions, higher interest rates, and a volatile bond market. This environment could cause refinancing and loan modifications to become more challenging, especially for lower-tier properties like Class B/C offices and malls. Additionally, the question remains of how long lenders will be willing to keep modifying loans, as the hope for a return to lower rates might fade with the Fed’s current stance and concerns about inflation and national debt.

Do you think there’s a chance that CRE loans might stabilize if the economy shifts, or do you expect the difficulties to persist longer than anticipated?

 

Source:  GlobeSt.

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PwC Says This Is The ‘Hottest Piece’ Of Real Estate In 2025

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Investing in commercial real estate (CRE) can be challenging, with many looking for assets that promise high returns. For 2025, one sector that stands out is data centers, which PwC’s Bill Staffieri, alongside his partner Ricardo Ruiz, referred to as the “hottest piece of real estate right now” during their presentation at the ULI New York: Real Estate Outlook 2025 event at NYU Stern School of Business.

The AI Impact

Staffieri’s bullish stance on data centers is closely linked to the rise of artificial intelligence (AI), which is creating significant demand for these facilities.

“AI spending was just shy of $200 billion in 2024,” Staffieri noted, “and we expect that number to soar to over $800 billion in the next five years.”

Major Investments in Data Centers

Tech giants are rapidly ramping up their investments in data centers to capitalize on this growing demand. One of the biggest moves has been EDGNEX Data Centers, a subsidiary of DAMAC, which recently announced a $20 billion investment in data centers and related platforms. This investment marks DAMAC’s first venture into the U.S. market.

Amazon is also making waves, with its Web Services division planning to invest around $11 billion in AI infrastructure and cloud computing in Georgia, aiming to expand its data center presence and create 550 new jobs.

Meta is following suit, announcing a $10 billion AI-focused data center project in Richland Parish, Louisiana, one of the state’s largest-ever private investments.

With so much activity surrounding the sector, Staffieri added, “If I won the lottery, I’d invest in data centers. I believe this trend will continue for years.”

Don’t Overlook Retail and Self Storage

While data centers are generating a lot of attention, Staffieri also sees potential in the retail sector. While retail has had to adapt in the face of e-commerce growth, there’s still a solid outlook for certain types of retail.

“Most retail subtypes are seeing rent growth and stability,” he observed. However, he pointed out that power centers and outlet centers are facing challenges.

Additionally, Ruiz highlighted another sector to watch: self-storage. Despite facing some recent cap rate compression, self-storage remains strong. “It’s largely institutionalized, with strong demand,” he explained.

On the other hand, Ruiz expressed concerns about the life sciences sector, which he ranked as one of the weakest in terms of investment potential. “Oversupply in many markets is really affecting this space,” he noted.

As we head into 2025, it’s clear that while data centers are drawing the most attention, there are still promising opportunities in retail and self-storage, while caution is advised for life sciences investments.

 

Source:  GlobeSt.

 

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CRE Experts Pessimistic About More Rate Cuts in 2025

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As 2025 approaches, optimism is high in the commercial real estate (CRE) industry, thanks to recent interest rate cuts by the Federal Reserve. However, not everyone is convinced that further cuts are likely.

At a ULI New York panel, Lisa Pendergast, Executive Director of the Commercial Real Estate Finance Council, expressed doubts about additional rate cuts, citing the Fed’s caution to avoid triggering inflation, which spiked to 9.1% after the pandemic. L.D. Salmanson, CEO of real estate software firm Cherre, echoed this sentiment, noting that any shift in Fed policy would require significant changes in leadership.

Despite recent rate cuts, borrowing remains costly, with rates ranging from 5.5% to 7%, complicating the CRE market. Pendergast pointed out that many large deals are being extended rather than refinanced. Salmanson warned that the high cap rates (around 7%) are unfavorable for development, urging a return to rates of 4-5%.

Beyond borrowing challenges, Salmanson raised concerns about economic policies under a potential second Trump term, particularly on immigration. He warned that halting immigration could lead to higher labor costs, exacerbating inflation.

While the outlook is mixed, there is hope in deregulation. Pendergast believes that a Trump administration could create a more business-friendly regulatory environment, easing the burden on CRE players.

Some are more optimistic, with panelists like Sarah Hawkins of Hines noting a resurgence in demand for CMBS deals, signaling a potential recovery in the debt markets and overall CRE activity in 2025.

 

Source:  GlobeSt.

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A New Dawn For CRE Investing?

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This year marks a fresh start for commercial real estate investment, with both opportunities and challenges ahead, according to LaSalle Investment Management’s 2025 Global Outlook.

Bright spots include growing investor optimism, prices aligning with bond yields, easier access to debt, and lower short-term interest rates. However, dark clouds such as geopolitical uncertainty, lower transaction volumes, and high long-term interest rates remain.

Brian Klinksiek, LaSalle’s global head of research and strategy, noted that while investor sentiment is positive, “the sky is looking a little gray.” The outlook reflects expectations of a soft landing for the U.S. economy and more accessible capital, though transaction activity remains slow. Despite this, distressed property volumes are far lower than during the Global Financial Crisis.

The office sector is especially troubled, with falling prices and rising vacancy rates. However, LaSalle sees opportunities in targeted markets. Jeff Shuster, president of LaSalle Value Partners US, advised that opportunities will arise in the office sector if investors choose the right locations.

Other promising investment sectors include medical buildings, industrial outdoor storage, and flex logistics spaces. While industrial demand is mixed, retail investments require selectivity due to a surge in construction starts. Even in the office market, well-located, modern properties with strong tenant rosters offer potential. Notable areas include Culver City in Los Angeles and Fifth Avenue in Manhattan.

 

Source:  CPE

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Ten Banks Most Exposed to Unrealized CRE Losses

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Although interest rates have eased in recent months, banks are still grappling with significant exposure to unrealized losses linked to commercial real estate (CRE), according to a report from the Banking Initiative at Florida Atlantic University.

In the third quarter of 2024, 59 out of the largest 155 banks in the U.S. had CRE exposures exceeding 300%, placing them at risk of regulatory scrutiny and enforcement actions.

Industry experts have expressed concerns over potential losses tied to CRE mortgages, especially as hundreds of billions of dollars in loans are set to be repriced in the coming years within the context of a high-rate environment, FAU notes. Many of these loans were originated as five-year balloon mortgages during a lower-rate environment between 2019 and 2021.

“The looming refinancing of loans, coupled with a growing number of commercial properties being sold at discounted prices compared to pre-pandemic values, has revealed weaknesses not only in commercial real estate mortgages but also in commercial real estate construction loans and unused commitments to fund such loans,” FAU explained.

The U.S. Banks’ Exposure to Risk from Commercial Real Estate screener analyzes 155 of the country’s largest banks and reviews quarterly data from the Federal Financial Institutions Examination Council’s Central Data Repository. The screener calculates each bank’s total CRE exposure as a percentage of the bank’s total equity.

Here are the top 10 banks most exposed to CRE risk, based on this ratio:

  1. Dime Community Bank (602% CRE exposure to equity)
  2. EagleBank (571%)
  3. Bank OZK (566%)
  4. Live Oak Banking Company (550%)
  5. Merchants Bank of Indiana (539%)
  6. Flagstar Bank (539%)
  7. ServisFirst Bank (538%)
  8. First Foundation Bank (513%)
  9. Provident Bank (488%)
  10. First United Bank and Trust Co. (478%)

 

Source:  GlobeSt.

 

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Special Service Rate Hits 9.89%, Highest In Four Years

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For the first time in four years, the overall CMBS special servicing rate across all vintages reached 9.89%, according to Trepp. This marks an increase of 311 basis points from 6.78% in December 2023, and a rise of 36 basis points from November 2024.

The property type with the highest special servicing rate was office, at 14.78%, which represents a 15 basis point increase month-over-month. Over the past year, the office sector saw a sharp rise of 633 basis points. The last time the office special servicing rate surpassed 14% was for three months in 2012, following the global financial crisis. Should the rate reach 15%, it would represent the highest level since 2000, according to Trepp.

Another notable category is mixed-use properties, which saw the largest month-over-month increase from November to December 2024, rising by 181 basis points. This marked the first time since 2013 that mixed-use special servicing exceeded 11%.

Retail followed closely with the second-highest special servicing rate in December at 11.67%, though this was a slight decrease of 12 basis points from November after five consecutive months of increases.

Multifamily properties, which had the second-lowest special servicing rate a year ago at 3.17%, saw an increase to 8.72% in December, up from 7.37% in November, making it the third-lowest special servicing rate in December 2024.

The lodging special servicing rate rose by 14 basis points from November, reaching 8.29% compared to 8.15% the previous month, and a jump from 7.13% in December 2023.

Industrial properties continue to have the lowest special servicing rate, remaining under 1% at 0.56%. A year ago, this rate was 0.37%, and it was 0.38% in November.

In December, $2.3 billion worth of loans were transferred to special servicing, the smallest amount since July 2024. Mixed-use and office loans dominated the transfers, representing 22.0% and 21.8%, respectively. The remaining transfers were spread fairly evenly across multifamily, lodging, industrial, and retail sectors.

The largest loan transferred was the $1.07 billion Workspace Property Trust Portfolio SASB loan, which included both A-Piece ($209.8 million) and B-Piece ($850 million) components, along with an additional $120 million fixed-rate loan. The transfer was prompted by an imminent non-monetary default ahead of the loan’s maturity in July 2025.

Another significant transfer involved the $519.5 million Yorkshire & Lexington Towers loan, which was triggered by payment default. The loan was backed by two multifamily towers on Manhattan’s Upper East Side, which had a DSCR (NCF) of 1.65x and 93% occupancy in the first half of 2024.

The key question now is how long this upward trend in special servicing rates will continue.

 

Source:  GlobeSt.

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CRE Valuation Uncertainty Threatens Private Equity Real Estate Model

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Falling commercial real estate (CRE) valuations have been a persistent challenge, impacting refinancing and mortgage covenants. Jim Costello of MSCI Research highlighted that the uncertainty around asset valuations and limited partners’ ability to access capital are risks to the U.S. private equity real estate model, especially with gated withdrawals at some open-end CRE funds.

During the pandemic, ultra-low interest rates and increased liquidity led to a surge in CRE investments, driving up prices. However, rising inflation and higher interest rates later caused valuations to drop, affecting private equity firms. Despite using advanced models, there were significant variations in asset value assessments, creating opacity in the market.

MSCI data showed that the U.S. had the worst performance globally, with a -6.8% difference between appraised values and sale prices. This situation echoed past concerns about inflated valuations in the 1990s at Prudential Insurance. While no misconduct was implied, Costello noted that during falling valuations, managers might be incentivized to delay revealing asset value drops.

Further data showed central business district office appraisals had fallen 43%, while transaction prices dropped 51%, suggesting the need for more transparency through third-party validation methods for limited partners.

 

Source:  GlobeSt.

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Where Commercial Foreclosures Are Surging

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Commercial foreclosures are on the rise in Florida as borrowers continue to face significant challenges.

In September, the state saw 70 commercial foreclosures, up from 47 the previous year, with 538 foreclosures reported by late 2024. This marks a notable increase from the record-low figures seen in 2020, according to real estate data provider Attom.

The uptick in foreclosures is largely attributed to higher interest rates, which have increased monthly payments for many borrowers with adjustable-rate mortgages. Additionally, those with expiring low-rate loans are finding it difficult to refinance at current, higher rates. Development site owners are also struggling, as the combination of rising interest rates and elevated construction costs has made it challenging to move forward with projects as their land loan maturity dates approach.

Attom’s report highlights that while commercial foreclosures are rising nationwide, they have not yet reached the levels seen in previous years. In Florida, foreclosures peaked at over 880 in 2015.

 

Source:  OBJ

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