CRE Delinquencies Accelerate As Industry Waits For Rate Relief

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Commercial real estate debt delinquency rates continue to rise with the office sector playing a particularly strong role as its constituents work through bank portfolios, says S&P Global.

The overall delinquency ratio for those loans increased quarter-over-quarter 16-basis points to 1.450%. That came from higher interest rates making refinances more difficult to obtain. The problems are concentrated in the office sector, according to this S&P analysis. However, the firm did say that there is a “sharp decline in medium-term interest rates as Federal Reserve cuts near stands to provide some relief.”

Absent some disastrous surprise in inflation or the labor market, the Fed has already signaled that it will start cutting rates this month. But a sharp decline in any interest rates is far less in focus. Chances are that the September cut to the federal funds rate — the range at which depository institutions will lend to one another overnight without collateral — will be 25 basis points. It might go as high as 50 basis points, but that seems less likely.

When the Fed is done cutting, the total will probably be between 100 and 200 basis points, or somewhere between 3% and 4%. That would be much higher than the relative peak of 2.42% in April 2019. S&P Global recently noted,maturing mortgage rates have been on average 4.3%. Add whatever spread will be in fashion, and some sources have speculated that lenders will trend toward the broader after recent experiences in being caught by inflation — and it may be that wherever Fed rates eventually land, the prevailing CRE interest rates may not be that much more attractive than today.

In conjunction with this, S&P Global noted that the year-over-year growth of bank CRE lending was 2.9% in the first quarter of 2024 and 2.2% in the second quarter. In the third quarter of 2022, it was 12.1%. This shows how much depository institutions have pulled back as well as the degree to which property values have fallen, as the growth in lending is measured in dollars, not in property counts.

The number of banks that exceed 2006 CRE loan concentration guidance has been falling, from 577 in the first quarter of 2023 to 482 in 2024 Q4. The 20 banks with the largest CRE portfolios saw CRE loan totals dropping by a median of 2.1% year over year. There were declines in 12 of them.

It’s been a week of difficult news about long-anticipated waves of CRE mortgage maturities.JLL estimated $1.5 trillion in maturing debt by the end of 2025, roughly 25% of which faces refinancing challenges. About 40% of those properties needing refinancing are multifamily units, meaning that a focus on office as the risky area may not address enough. S&P Global has forecast maturity waves a few yearsout: $946 billion in 2024, $998 billion in 2025, $1.148 trillion in 2026, $1.257 trillion in 2027, and $1.138 trillion in 2028.

While the concept of a maturity wall has been a topic for discussion, it is moving toward a point of practical implications. Such growing pressures mean there is only so long that borrowers can outlast financing costs they can’t afford, and lenders can delay dealing with defaults.

 

Source:  GlobeSt.

 

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Sperry – RJ Realty’s Ron Osborne Reps Buyer In Purchase Of Retail Property In Hallandale

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Ron Osborne, Managing Director/Broker of Sperry – RJ Realty, represented the Buyer, a major investor within the Hallandale Blvd. market, in the purchase of a former used-car dealership located at 3901 W. Hallandale Beach Blvd, in West Park, Florida.

The deal closed  August 19.

While the property is currently a used car dealership, it is a non-conforming use, and the city will not permit the use in the future.

Sperry – RJ Realty was one of several brokerages vying for the listing, however, the ownership decided to move forward with another brokerage due to a personal relationship.

Within a day of his initial meeting with the Seller, Osborne brought in a contract at 95% of list price of $895,000 with a non-contingent, 30-day closing other than clear and marketable title with the full contract price placed in escrow. The transaction was scheldued to close in less than 30 days, however, the only thing that delayed the closing was the seller’s inability to deliver the property with clean title due to several code violations which needed to be resolved before closing.  The Seller was unable to resolve one of the code issues and Osborne was able to persuade his client to purchase the property with the code issue and negotiated a discounted price.

“We always recommend that a seller considers ordering a code, lien and open permit search when they list a property,” explained Osborne. “If the owner has owned the property for many years, we also may recommend doing a title search to ensure clean title can be conveyed.  This way, if there are any issues, they can be addressed before a contract is negotiated.”

Osborne has represented the investor previously. They own the properties that border the subject property on both sides and have plans to redevelop them.

“It is all about knowing the right buyer for a property, and knowing what can be done with it in the future,” added Osborne. “This area has gone through and is continuing to go through major changes.”

Osborne has been working the Broward County Market since 1978 and is a top producer in the Sperry Commercial Global Affiliates (SPERRY).  When thinking of selling, hire the best broker for the job, not the one that you’re friends with.

The property was listed by Gus Martinez of KW Commercial.

 

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Landlords Face $1.5T Maturity Wall Before 2026

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For the last two years, many lenders, brokers, analyst firms, and other experts have warned about a coming CRE debt maturity wave. JLL has seized this wave and estimates that the total due by the end of 2025 is $1.5 trillion and that about a quarter, or $375 billion, will have a hard time refinancing.

The basics have faced the industry for years now. Through the pandemic, two events happened. One, the Federal Reserve pushed an easy monetary policy to increase liquidity, and the federal government pumped rescue money into the economy, both at rates never before seen. Two, inflation quickly rose, as classical economics would suggest, and the Fed boosted interest rates to battle it.

Higher borrowing rates were a shock even though they weren’t out of keeping with historical norms. However, CRE borrowers recently experienced ultra-low rates, as Fed Chair Jerome Powell has described them. The differential was sudden and high. Transactions fell and, as a result, so did the valuations of many properties.

About 40% of the properties that need refinancing are multifamily ones, according to Fortune. Many of the owners financed their purchases using three-year floating-rate loans. It wasn’t an unusual strategy, but many using it frequently missed the addition of a hedge against rising interest rates. They had been relatively low since the aftermath of the Global Financial Crisis and many investors and developers assumed conditions would continue that way.

They got caught. Lower property values and higher interest rates ate up increased rents, undermined net operating income, and reduced the debt service coverage ratio, making the property a bad risk. There’s no telling how much of the 40% of the whole oncoming debt, which is multifamily properties, overlaps with the 25% estimated portion that faces trouble.

“A large portion of the multifamily world is underwater at the moment,” Catie McKee, director and head of commercial-mortgage-backed securities trading at Taconic Capital Advisors, told Bloomberg. “A lot of the equity is gone, but it’s an asset class that is pretty resilient over time. It’s underwritable, it just needs a capital infusion.”

Getting that capital injection may be a challenge. Matthew McAuley, research director at JLL, told the news outlet that the funding gap is $200 billion to $400 billion at present.

At the upper end, that is even larger than the estimated amount of total debt that may be in trouble.

 

Source:  GlobeSt.

 

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Net Lease’s Meteoric Rise In Inventory And What It Means For Cap Rates

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The net lease market has witnessed an astounding transformation in the last two years. From May 2022 to May 2024, the total supply of net lease available assets has increased from $9.05 billion to $24.3 billion. That represents a 168% jump in inventory in only 24 months despite average cap rates rising 88 basis points during that same period.

Many participants in the net lease market are overlooking the major storm brewing on the horizon. Despite rising cap rates, inventory levels continue to swell, signaling that cap rates will almost certainly climb much higher to restore market equilibrium. Here, we explore the reasons behind this trend, analyze the underlying data and discuss implications for the future so you can stay ahead of the market.

 

The Cap Rate Pendulum Swings

Coming off historically hot market conditions in 2021, with cap rates at all-time lows, the market experienced a dramatic shift. Inflation and interest rates quickly skyrocketed, leading to a far higher cost of financing with an ensuing slowdown of buy-side activity. By late 2022, market transaction velocity was plummeting despite a steady influx of assets hitting the marketplace. Sellers have been holding onto “hope certificates” for the past 18 months, anticipating that cooling inflation and potential Federal Reserve interest rate cuts would lure investors back to buying at aggressive cap rates. However, none of that has come to pass, and the supply/demand imbalance has reached its breaking point.

 

The Current Marketplace in Four Tenants

Market transaction and cap rate data on four specific, highly traded retail net lease tenants provide an incredible snapshot of the broader marketplace dynamics. Chipotle, Starbucks, 7-Eleven and Walgreens are some of the most commonly traded net lease brands, and these tenants provide a fascinating illustration of how the landscape has radically shifted. Over the past two years, cap rates for these tenants have steadily increased, mirroring the overall market shift.

In 2022, the average cap rate for 7-Eleven was 4.51%. By 2023, it had risen to 5.38%. For Chipotle, the average cap rate increased from 4.26% in 2022 to 4.88% in 2023, reaching 5.08% in early 2024. Starbucks saw its cap rate go from 4.75% in 2022 to 5.29% in 2023, and it currently sits at 5.47% in 2024. Walgreens experienced the most dramatic rise, with cap rates moving from 5.60% in 2022 to 6.25% in 2023 and a significant jump to 7.19% in 2024.

These increases in cap rates have been accompanied by a sharp decline in the number of closed transactions. For instance, 7-Eleven saw 148 closed comps in 2022, dropping to 114 in 2023 and just 24 so far in 2024. Similar trends are evident across the other tenants, with Starbucks seeing a drop from 158 closed comps in 2022 to 124 in 2023 and 47 in 2024.

These market conditions and numbers tell a sobering story. Despite cap rates rising substantially over the past two years, on-market inventory has exploded, and transactions have collapsed. This implies that cap rates still have far to go to find market-clearing buyer demand. Let’s look forward and consider how this will play out in the coming months.

 

The Tipping Point: Motivated Sellers and Accelerating Cap Rates

Within the current on-market inventory, there are both motivated sellers and those with lower eagerness to sell. Motivated sellers, who must make deals due to factors such as loan maturities and financial pressures, make up a large percentage of the market. Therefore, the crux of the pressure within the market lies in the decisions these highly motivated sellers will make and to what extent they will loosen up their pricing. In turn, as the inventory of motivated sellers grows, we can anticipate a notable shift.

As time passes, the urgency for motivated sellers will intensify as loan maturities and financial pressures draw nearer. With a glut of inventory in the marketplace, these sellers will feel compelled to price their assets more aggressively, lowering prices and increasing cap rates to more quickly attract buyer engagement. These highly motivated sellers will have an outsized impact on the market comp data – particularly when transactions are at a relatively low point – setting lower ceiling benchmarks on valuations.

This shift is likely to have a snowball effect. As more sellers observe transactions closing at higher cap rates, fear of further increases will set in. This will drive a sense of urgency, prompting even more motivated sellers to enter the market and accept the new pricing reality. Highly motivated sellers, however, are not the only ones who may want to change their game plan. Conversely, fewer may choose to withdraw their assets from the market and hold onto them if cap rates rise too much. We believe that given the glut of supply of those tenants mentioned earlier, as well as many other household name net lease credit tenants, the result could be a rapid upward adjustment in cap rates, potentially climbing 50 to 75 basis points from current levels through 2024 and well into 2025.

The cycle will then repeat itself as more highly motivated sellers need to transact and “leapfrog” the cap rates from prior sales, until such time the new crop of buyers take notice of the attractive pricing levels in the net lease market and flood in. This process will continue until a happy medium is found where transaction volume consistency and cap rate fluctuation will stabilize in cohesion with one another.

 

Navigating the New Landscape

For brokers and investors alike, this evolving landscape presents challenges, but where there is a challenge, there is an opportunity. Understanding the motivations behind current inventory levels and anticipating the likely shifts in cap rates can inform strategic decision-making. Sellers who recognize the changing tide and adjust their expectations proactively may find themselves better positioned to navigate the market effectively ahead of time, rather than being forced to react more drastically as the pattern continues.

On the buyer side, the coming months may present unique opportunities. Higher cap rates can translate into more attractive yields, drawing in investors who have been on the sidelines. As the market finds its new equilibrium, savvy buyers will look to capitalize on the evolving conditions, securing desirable assets at favorable pricing.

The current logjam in the net lease marketplace is a complex phenomenon driven by rising cap rates and shifting economic conditions, and the breaking of this logjam will be marked by a period of rapid adjustment. Sellers, driven by necessity, will set new cap rate benchmarks, accelerating the market’s recalibration. While the near-term outlook suggests further upward pressure on cap rates, the market’s ability to adapt will ultimately determine the trajectory. By staying informed and responsive to these dynamics, stakeholders can navigate the challenges and uncover opportunities in this evolving landscape.

 

Source:  GlobeSt.

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Distress: Not Widespread Yet But On The Rise

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The topic of distressed properties as a potential investment target has been prevalent over the past several months, but sales data suggests distress isn’t yet as widespread as many think.

According to an analysis by Colliers director of research for U.S. Capital Markets Aaron Jodka, distress sales have averaged $2.1 billion per quarter since the beginning of 2023. This is below the quarterly average of $2.2 billion from 2017 to 2019 and is much lower than the amount that occurred during the Global Financial Crisis of 2008.

“Based on this metric, distress isn’t widespread; it’s normal,” said Jodka, noting distress has been limited since the pandemic began. “However, it is on the rise, with newly troubled loans running at a pace 5x pre-pandemic.”

Hospitality was the asset class most impacted by distress activity at 7.2% of total sales. Office ranks second at 3.8%. The industrial sector has shown minimal with only $1.7 billion outstanding, compared with $41 billion outstanding in the office sector for the second quarter.

Distress is a viable investment target, with numerous properties selling at steep discounts to their previous sale price and well below replacement costs, said Jodka. He encouraged investors to remain vigilant as the potential for distress opportunities remains across all asset classes.

According to MSCI, multifamily has the highest share of potential distress at nearly $71 billion, followed by office at $67 billion, as well as retail, hospitality and industrial totaling between $32 billion and $36 billion.

The top five markets in terms of distress are Manhattan with $17.2 billion currently in distress, San Francisco and Chicago both with $7.2 billion each, Los Angeles with $4.4 billion and the New York City boroughs with $3.7 billion, the analysis said.

“It’s important to note that differences exist from market to market,” said Jodka. “For example, although San Francisco and Chicago have similar totals, the factors driving them vary significantly. Chicago is propelled by office distress, while San Francisco is dominated by multifamily.”

Understanding where distress is today and where it will emerge in the future will be crucial in helping investors unlock acquisition targets, he added.

 

Source:  GlobeSt.

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In A Switch, Large Property Sales Outperform Smaller Deals

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There’s evidence of some reversal in a pattern of property sales based on size from the middle of 2023.

Similar to the value-weighted and equal-weighted, smaller properties did better in the long run. Investment grade was down 3.4% over the 12 months while the commercial grade was up 6.2%. There is no explanation or speculation on why smaller properties have been doing better. Perhaps it was a result of rising interest rates and price differentials. When financing is more expensive, a less costly property might make a project viable.

In a new Real Estate Alert, Green Street wrote that in the first half of 2024, small property sales growth didn’t hold up as well as large institutional offerings. From January to June, properties in the $5 million to $25 million range fell 10.7% from $44.32 billion in the first half of 2023 to $39.58 billion in the first half of this year, according to the firm’s sales comps database.

Compare that to properties in the $25 million and higher category, where sales activity was down only by 8.6%. It’s the first time since the full year of 2021 that larger properties outperformed the less expensive category.

Green Street said there were a few reasons for the reversal: fewer distressed deals in the small-property space, increased focus by private investors buying more expensive properties while institutions wait out volatility and two giant apartment trades.

Kevin Aussef, president of investment properties in the Americas for CBRE, told Green Street that one reason for the lack of activity among smaller properties is less distress. Many private clients weren’t typically late-cycle buyers and they weren’t typically leveraged with mezzanine debt.

Or maybe there might have been greater opportunities for distressed purchases among larger properties. Over the last year and a half, there have been many major CRE players and analysts discussing the fall of office valuation. And yet, there hadn’t been that many large buildings selling at big losses. But that type of sale is important to finding a bottom.

“Usually that’s the sign that things are about as bad as they’re going to get. When people finally throw in the towel,” Matt Reidy, director of economic research at Moody’s, told GlobeSt.com. “We haven’t seen much of that in the larger transaction space until this most recent quarter. We didn’t see owners selling properties at really large dollar losses, like $100 million from when the property was acquired.”

 

Source:  GlobeSt.

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Office Leads Higher CMBS Special Servicing

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The CMBS special servicing rate is continuing to creep higher. In July, it was up month-over-month, by seven basis points to reach 8.30%, according to Trepp.

This year, special servicing started at 6.95% and has grown every month, meaning an additional 135 basis points since January 1, 2024, and 168 year-over-year. The rate is at a three-year high and is currently 350 basis points above the July 2022 level. The seven-basis movement is small – but the cumulative shift is significant.

Special servicing rates vary by property type. Currently, office is at the top with the July 2024 special servicing rate of 11.25%, up from 7.33% a year ago. The next highest was retail at 10.89%, only two basis points above the 10.87% rate the prior year. Then mixed-use went from 6.89% in July 2023 to 8.93% in July 2024. Lodging was 7.06% in 2023 and 7.33% in 2024. Multifamily saw a more appreciable absolute gain to 5.11% from 3.26%. The smallest level of special servicing was industrial’s increase from 0.31% to 0.40%. The change between June and July 2024 was industrial (-3 basis points); lodging (+5 basis points); multifamily (-6 basis points); office (+46 basis points); mixed-use (-41 basis points); and retail (+7 basis points).

As usual, type 2 CMBS loans were in much better shape than type 1. The distribution of the former, from July 2023 to July 2024, was industrial (0.20% to 0.30%); lodging (6.95% to 7.27%); multifamily (3.26% to 5.11%); office (7.06% to 11.21%); mixed-use (6.99% to 9.12%); and retail (10.26% to 10.35%). For the June to July move, the amounts were industrial (-3 basis points); lodging (+5 basis points); multifamily (-6 basis points); office (+47 basis points); mixed-use (-41 basis points); and retail (+12 basis points).

For type 1, the year-over-year changes were industrial (69.35% to 84.11%); lodging (35.13% to 24.94%); multifamily (0.00% to 11.76%); office (41.07% to 17.91%); and retail (66.22% to 93.68%). Month-over-month changes were industrial (+99 basis points); lodging (+16 basis points); multifamily (-7 basis points); office (-25 basis points); and retail (-40 basis points).

The rates could have been worse. According to Trepp, new transfers joining special servicing were on the “lighter side,” just under $1.9 billion. The two largest loans entering special servicing were the $400 million Bank of America Plaza loan because of imminent maturity default and the $233 million Aspiria Office Campus loan because of an imminent balloon payment default before an August maturity date.

 

Source:  GlobeSt.

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Have Cap Rates Peaked?

Cap rate expansion may have very well peaked, but uncertainty will delay sales volume recovery until 2025, according to CBRE’s cap rates survey for the first half of the year.

cap rates graphTreasury yields remained volatile during the first half of 2024, reacting to economic data that sent mixed signals about the outlook for inflation, Federal Reserve policy and long-term interest rates. The 10-Year Treasury yield started 2024 below 4 percent and peaked at 4.7 percent in late April.

Ultimately, continued disinflation and expectations for a Fed rate cut held the 10-year Treasury yield to 4.2 percent as of June.

“Interestingly, different property types did not move in unison but rather reacted uniquely to changing fundamentals and capital markets drivers. For instance, industrial cap rates fell on average and office yields continued their climb,” according to the report.

More than 250 CBRE real estate professionals completed the survey with their real-time market estimates between May and June. The report captured 3,600 cap rate estimates across more than 50 geographic markets to generate key insights.

Every one of CBRE’s reports in the series asked respondents to estimate the direction of cap rates and the magnitude of the expected change during the next six months. This quarter, the most common response across all categories was “no change.” Fewer respondents believe cap rates will increase during the next six months compared to the previous two publications.

“This improved sentiment is likely driven by more accommodative signals from the Fed and the decline in bond yields from their October 2023 peak,” the survey revealed.

The share of respondents expecting further devaluations was highest within the office sector, reflecting the uncertainty around market fundamentals.

Buyers coming off the sidelines

Doug Ressler, manager of business intelligence at Yardi Matrix, told Commercial Property Executive that it appears that cap rates have indeed peaked but ongoing uncertainty is expected to delay sales volume recovery until 2025.

“During the first half of 2024, cap rates held steady despite fluctuations in Treasury yields,” Ressler said. “Different property types reacted uniquely to changing market conditions, with industrial cap rates decreasing and office yields continuing to rise. Most respondents in the survey believe that cap rates will remain stable in the near term.”

Peaking will differ by market and property type, Ryan Severino, chief economist at BGO, told CPE.

“There has been tentative evidence of peaking broadly, and that looks almost certain with the Fed set to start cutting rates,” Severino said. “The first-order effect of a rate cut won’t have much impact. But the second-order effect, decreasing the risk premia embedded in cap rates, should be more meaningful—especially with the record amounts of dry powder sitting on the sidelines like Pavlov’s dogs waiting for the Fed to ring the bell.”

Matthew Lawton, executive managing director at JLL, mentioned cap rates peaked in the second quarter and have a downward trend based on some recent transactions, including the KKR portfolio acquisition and other recent one-off transactions in the multifamily space.

“We are seeing a significant number of buyers coming off the sidelines due to several factors, including discount-to-replacement costs, lack of new starts that will lead to outsized rent growth and bringing in residual cap rates due to treasuries stabilizing and coming in more recently,” Lawton pointed out.

Equilibrium must avoid negative leverage

Recent data suggests there is uncertainty in office cap rates in some major markets, according to Jeff Holzmann, COO at RREAF Holdings.

He further added, “But that peak assumption is only a short-term observation since the cap rates are closely related to interest rates. The equilibrium can only survive long term as long as we are not in the zone referred to as negative leverage. This occurs when the effective cap rate is lower than the interest rate of the debt, which means that even a functioning property that is producing cash flow can’t service its own debt, not to mention profits. That’s when properties fail, loans stop, and a new equilibrium must emerge.”

“Hence the future trajectory of the cap rates in the industry will depend on what the Federal Reserve does with the interest rates in the coming months. The consensus seems to be that rates will remain steady or possibly even decrease for the first time in a long time. This suggests we may see peak cap rates for quite some time,” Holzmann concluded.

Neil Schimmel, Investors Management Group founder & CEO, noted that with inflation and debt pricing falling, cap rates are poised to follow suit.

“Loan rates have dropped 50 basis points in the past few weeks. Today’s underwhelming jobs report confirms the Fed’s success in cooling inflation. As a result, cap rates have likely peaked and will decline, though not to the lows of 2021 and 2022.”

 

David Camins, principal at Xroads Real Estate Advisors, told CPE that the argument could be made that cap rates have peaked in the office sector; however, they may be “the least of the worries for a potential buyer,” considering the number of lenders still not lending to the office sector.

“Anyone underwriting a loan or investment in the sector is not solely focused on a cap rate, as underwriting the cash flow for a multi-tenant office property is not as linear as it once was,” Camins said. “These days, it’s more akin to how hotel cash flows used to be underwritten.”

“Even if lease rates are relatively the same, they are materially different given the ‘new’ creativity within the concession packages. These all contribute to challenging cash flow projections, regardless of what economic factors are under consideration,” he concluded.

 

Source:  CPE

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Lenders Turn Up The Foreclosure Heat

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Many analyst takes on commercial real estate markets have been in terms of where loans stood. This includes CMBS, banks and what have you – but the question has been percentages of delinquencies or properties in special servicing.

There’s been an assumption that banks in particular have been indulging in the practice colloquially called “extend and pretend.” In April, Autonomous Research estimated that 40% of bank CRE loans maturing this year actually being holdovers from 2023 and that banks on average are reserving 8% of their CRE portfolios, which is about five times more than normal. PGIM Real Estate that expected bank CRE maturities was up 35% from previous estimates.

But where the concrete meets the pavement, if you will, is when lenders take back properties, whether because borrowers have walked away, or the hammer has come down in a foreclosure. That’s on the rise, according to a Wall Street Journal report.

Portfolios of foreclosed and seized properties reached $20.5 billion, according to data from MSCI. That’s a 13% quarter-over-quarter jump and the highest figure since 2015.

Back to extend and pretend. No lender wants to take the keys back. They don’t have the expertise in profitably running a building nor the desire. Legally holding the property means that the value hits the balance sheet in an uncomplimentary way and investors start asking what is going on.

However, delay tactics last only so long because auditors will eventually say the time has come to admit defeat. Then investors can see what is happening and they start asking pointed questions.

A Journal graph of the MSCI data shows the total of seized properties over time. The current $20.5 billion isn’t at the heights of the Global Financial Crisis when it was more than double. But the trend line is on an upswing, suggesting a good chance that things could get considerably worse, especially in offices, where only 15% are in the Class-A category, which has maintained values higher values and lower vacancies. The remaining 85% are in potentially big trouble because there is decreasing evidence that they can be saved by would-be tenants.

Higher rates of foreclosures have, in the past, signaled the end of a crisis and the arrival of a bottom. Lenders who take back properties usually want it off their books quickly. That can aid price discovery, as the Journal notes, and help the market start to work again.

Currently, the economy is looking relatively strong, with a first Fed rate cut possibly in the offing in September. Should there be a slide, however, CRE markets could get far worse.

 

Source:  GlobeSt.

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CRE Distress Rises To $94.2B In Q2

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Total cumulative U.S. commercial property distress has risen to $94.2 billion in the second quarter of 2024, up $2.0 billion from the previous quarter, data provider MSCI said in its quarterly Capital Trends US Distress Tracker.

While the period saw $10.6 billion of new distress, $8.6 billion was resolved.

In the same period a year ago, net additions were higher, at $10 billion, MSCI noted.

Office accounted for $41.0 billion of total cumulative distress in the second quarter, while retail accounted for $21.8 billion. The apartment, hotel, and industrial sectors accounted for $14.0 billion, $13.3 billion, and $1.7 billion, respectively.

In the second quarter, the balance of potential distress reached $201 billion, with apartment assets leading this category at $56.9 billion, followed by the office sector with $50.9 billion.

Office and apartment assets accounted for most of the new distress, including one apartment property, the 3,165-unit Parkmerced in San Francisco, which was transferred to a special servicer in April and added nearly $2 billion in distress volume, accounting for over half of new multifamily distress, the data provider said.

As a result, in contrast to most other markets, the apartment sector rather than office, was the dominant source of distress in San Francisco.

In the 10 markets with the most cumulative distress, the boroughs of New York City were the only other market where distress in the apartment sector, at 60% of the total, outweighed office sector distress.

Manhattan remained the leading area for distress nationally, due to “the volume of office distress alone,” MSCI said. “Chicago had the second largest balance of office distress, totaling $4 billion.”

The value of real-estate-owned (REO) properties, or properties or assets that lenders have taken back through foreclosure, also ticked up. The cumulative total of REO in the second quarter of 2024 rose 13% from the prior quarter and jumped 46% from the same period a year ago.

 

Source:  GlobeSt.

 

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