Distress Levels Hit $85.8B In 2023
There’s an interesting question about the current level of distress in commercial real estate. How much is there?
Some amount seems to be secret, as in not easily identified, instead being handled privately without an obvious full run-on distressed properties. And then there are properties on the brink but not yet in the distressed category.
MSCI’s US distress tracker report tries to make this clearer by discussing actual and potential distress. Distress “indicates direct knowledge of property-level distress,” they wrote.
“Known through announcements of bankruptcy, default and court administration as well as significant publicly reported issues — such as significant tenant distress or liquidation — that would exemplify property-level distress. This also includes CMBS loans transferred to a special servicer.”
Actual distress, according to the firm, totaled nearly $85.8 billion through the fourth quarter of 2023. Roughly $35.5 billion was office, $21.6 billion in retail, $14.7 billion in hotels, $9.6 billion in apartment, $1.6 in industrial, and $2.8 billion in other. But that is explicitly property-level distress.
Geographically that represents $10.3 billion for Mid-Atlantic, $13.4 billion in Midwest, $26.9 billion in Northeast, $8.6 billion in Southeast, $9.2 billion in Southwest, and $16.7 billion in West.
Loans privately modified to keep them from being written down or publicly disclosed would not be caught up in this category.
As the firm wrote, “Potential distress indicates that an asset’s current financial position has eroded and that it may become financial troubled. As of December, the value of assets classified as potentially troubled stood at $234.6b, or nearly three times that of distressed assets. Though apartments were responsible for the most significant slice of this value, new potential distress for multifamily assets seems to have moderated.”
That’s split up as follows: $67.3 billion in apartments, $54.7 billion in office, $35.5 billion in hotels, $34.9 billion in retail, $29.0 billion in industrial, and $13.3 billion in other.
Geographically, that represents $23.3 billion for Mid-Atlantic, $31.3 billion in Midwest, $47.5 billion in Northeast, $43.5 billion in Southeast, $33.3 billion in Southwest, and $55.5 billion in West.
“In the fourth quarter, the value of potential distress added to the market was lower for apartments than any other asset class,” MSCI wrote. “Of the $67.3b in multifamily potential distress, more than 30% of the value is tied to assets purchased in the last three years. Owners who made purchases at record-high prices may have found their assets landing on servicer watchlists as assumptions used to underwrite their acquisitions proved overoptimistic.”
Source: GlobeSt.
