A rise in distressed assets often signals that a real estate market is starting to overheat. According to experts at Kidder Mathews, the largest independent commercial real estate firm on the West Coast, a closer look at specific trends can provide clues about the future of commercial real estate prices and what to expect.
Challenges in Multifamily Investments
Apartments have long been a favored investment, but tighter margins and economic headwinds are creating challenges, particularly in the value-add multifamily segment. This has raised concerns about a potential increase in distressed assets.
Nathan Thinnes, Senior Vice President at Kidder Mathews, notes that “property liens are the canary in the coalmine.” He explains that vendors are often the first to be unpaid, and there has been a noticeable rise in accrued liens, especially in the multifamily sector. Over the past decade, syndicators have driven up prices in the value-add multifamily segment to levels 10 times higher than those seen during previous cycles. Combined with rising housing costs and an affordability crisis, this has resulted in higher eviction rates and increased vacancies, leading to bad debt. Thinnes highlights that higher interest rates are also forcing operators with high asset bases to struggle with cash flow.
Kidder Mathews Vice President of Research Gary Baragona states that office properties make up nearly 50% of distressed assets, with retail at 20% and apartments at 14%, according to Real Capital Analytics. He adds that the rate of distressed asset growth has slowed since late 2022, with the total value of distressed commercial real estate now roughly half of what it was during the peak of 2010.
Pricing Uncertainty in a Changing Market
In response to the Federal Reserve’s decision to lower interest rates in September, investors are grappling with new questions about the pricing of real estate assets, especially as distressed properties enter the market.
Thinnes explains that many assets, particularly commodity office buildings and value-add multifamily properties, will likely go through foreclosure, which could result in lower, more manageable asset prices.
Peter Beauchamp, Senior Vice President at Kidder Mathews, observes that the slower-than-expected rise in distressed assets is partly due to lenders being more willing to offer loan modifications or extensions based on the asset class. With an estimated $300 billion in commercial real estate loans maturing soon, it’s uncertain how quickly these loans will be worked through. Beauchamp also notes that upcoming changes in administration could delay the release of these assets if regulatory restrictions are eased.
Valuation Adjustments and Lending Conditions
Randy Clemson, Executive Vice President of Valuation Advisory Services at Kidder Mathews, points out that while there is still limited distressed work in the appraisal space, one notable exception is multi-tenant office buildings and back-office facilities, which have seen value drops of up to 75% in some cases. Due to the negative impact of appraisals on loan values, special servicers typically avoid ordering them unless absolutely necessary. Instead, asset managers tend to rely on broker price opinions and extend loan terms by 12 months.
Additionally, while the Federal Reserve has lowered rates, bank lending rates have not followed suit, and the 10-year Treasury yield has risen by more than 80 basis points since September. This has contributed to a lack of cap rate decreases, which are essential for improving the profitability of real estate investments.
Darren Tappen, Senior Vice President at Kidder Mathews, suggests that any hopes for a more favorable cap rate environment to assist in workout solutions are diminishing. However, he emphasizes that capital remains available for a market reset, as does the support of Kidder Mathews.
Source: GlobeSt.
CRE Optimism Abounds For 2025, But Distress Challenges Remains
As 2024 draws to a close, the mood in the commercial real estate (CRE) market has shifted toward optimism, fueled by favorable macroeconomic trends, supportive financial policies, and signs that a new growth cycle is underway, according to Crexi’s Q3 National Commercial Real Estate Report.
The Federal Reserve’s interest rate cuts are expected to have a significant impact on the CRE sector, particularly by reducing borrowing costs, stimulating refinancing activity, and encouraging new investments. While economic uncertainty persists, Crexi notes that signs suggest the market has reached its bottom, with early indications of growth in CRE. Along with strong buyer engagement on its auction platform, the firm reports that bid-ask spreads have narrowed since the second quarter, marketing periods have shortened, and capital raising efforts are beginning to recover.
In Q3, overall buying activity increased across all asset types, with industrial rising by 5.5%, office by 5.93%, retail by 4.87%, and multifamily by 4.97%. Offers for properties also saw an uptick, signaling that serious buyers are making moves. On the leasing side, tenant activity showed a slight decline across most sectors, with industrial tenant activity experiencing the largest drop.
Key highlights from Crexi’s report include:
Crexi also notes that approximately $2 trillion in CRE loans are set to mature over the next two years, with office properties accounting for nearly one-third of this maturing debt, followed by multifamily, retail, and industrial assets.
Source: GlobeSt.
CRE Investors Evaluate Distress Signals
A rise in distressed assets often signals that a real estate market is starting to overheat. According to experts at Kidder Mathews, the largest independent commercial real estate firm on the West Coast, a closer look at specific trends can provide clues about the future of commercial real estate prices and what to expect.
Challenges in Multifamily Investments
Apartments have long been a favored investment, but tighter margins and economic headwinds are creating challenges, particularly in the value-add multifamily segment. This has raised concerns about a potential increase in distressed assets.
Nathan Thinnes, Senior Vice President at Kidder Mathews, notes that “property liens are the canary in the coalmine.” He explains that vendors are often the first to be unpaid, and there has been a noticeable rise in accrued liens, especially in the multifamily sector. Over the past decade, syndicators have driven up prices in the value-add multifamily segment to levels 10 times higher than those seen during previous cycles. Combined with rising housing costs and an affordability crisis, this has resulted in higher eviction rates and increased vacancies, leading to bad debt. Thinnes highlights that higher interest rates are also forcing operators with high asset bases to struggle with cash flow.
Kidder Mathews Vice President of Research Gary Baragona states that office properties make up nearly 50% of distressed assets, with retail at 20% and apartments at 14%, according to Real Capital Analytics. He adds that the rate of distressed asset growth has slowed since late 2022, with the total value of distressed commercial real estate now roughly half of what it was during the peak of 2010.
Pricing Uncertainty in a Changing Market
In response to the Federal Reserve’s decision to lower interest rates in September, investors are grappling with new questions about the pricing of real estate assets, especially as distressed properties enter the market.
Thinnes explains that many assets, particularly commodity office buildings and value-add multifamily properties, will likely go through foreclosure, which could result in lower, more manageable asset prices.
Peter Beauchamp, Senior Vice President at Kidder Mathews, observes that the slower-than-expected rise in distressed assets is partly due to lenders being more willing to offer loan modifications or extensions based on the asset class. With an estimated $300 billion in commercial real estate loans maturing soon, it’s uncertain how quickly these loans will be worked through. Beauchamp also notes that upcoming changes in administration could delay the release of these assets if regulatory restrictions are eased.
Valuation Adjustments and Lending Conditions
Randy Clemson, Executive Vice President of Valuation Advisory Services at Kidder Mathews, points out that while there is still limited distressed work in the appraisal space, one notable exception is multi-tenant office buildings and back-office facilities, which have seen value drops of up to 75% in some cases. Due to the negative impact of appraisals on loan values, special servicers typically avoid ordering them unless absolutely necessary. Instead, asset managers tend to rely on broker price opinions and extend loan terms by 12 months.
Additionally, while the Federal Reserve has lowered rates, bank lending rates have not followed suit, and the 10-year Treasury yield has risen by more than 80 basis points since September. This has contributed to a lack of cap rate decreases, which are essential for improving the profitability of real estate investments.
Darren Tappen, Senior Vice President at Kidder Mathews, suggests that any hopes for a more favorable cap rate environment to assist in workout solutions are diminishing. However, he emphasizes that capital remains available for a market reset, as does the support of Kidder Mathews.
Source: GlobeSt.
What’s In Store For CRE Investment In 2025
As 2025 approaches, business leaders are focusing on potential opportunities for the upcoming year. For commercial real estate investors, there is cautious optimism that new prospects will emerge, even though transaction activity has slowed throughout 2024.
According to Ashley Fahey, editor of The National Observer: Real Estate Edition, the national commercial real estate market saw $40.1 billion in transactions during the third quarter of 2024. This marks a decline from $43 billion in Q2 and $44.4 billion in Q3 2023, as reported by Altus Group. While transaction activity has slowed, the pace of this decline has moderated, particularly on a year-over-year basis. Notably, 10 of the 15 property types tracked saw an increase in price per square foot in Q3, including mixed-use, manufacturing, automotive, and office properties.
Perry further noted that the market has entered a “new normal,” where both buyers and sellers are adjusting to a lack of comparable sales. Additionally, industry participants are trying to gauge how the policies of President-elect Donald Trump and a Republican-controlled Congress may impact the economy. While many remain hopeful that the incoming administration will bring deregulation or tax cuts, there are concerns that Trump’s campaign promises on immigration and tariffs could lead to inflation and increased economic uncertainty.
Source: SFBJ
CRE Borrowers Split On Financing Outlook Despite Improving Economic Conditions
Despite a challenging environment for commercial real estate financing in 2023 and the first half of 2024, a new report from Altus Group indicates that securing deals is becoming somewhat easier for both bank and non-bank borrowers compared to two years ago.
Altus Group surveyed over 400 U.S.-based commercial real estate professionals who are responsible for arranging financing. The findings reveal that while securing funding remains difficult, a noticeable gap exists in how bank and non-bank borrowers view the current lending landscape. This divide highlights ongoing challenges and inefficiencies within the industry.
Both bank and non-bank borrowers cited benefits such as personalized service, quicker financing, ease of securing funding, and lender stability. However, fewer borrowers from both groups emphasized personal relationships or business rapport as key advantages of working with their lenders.
While there was improved optimism about securing financing over 2023, concerns about high capital costs and economic uncertainty remain significant obstacles. Although interest rates have started to decline, the report notes it may take years for the Federal Reserve’s rate cuts to positively impact commercial real estate financing.
Non-bank borrowers, typically more pessimistic about the market, are looking for streamlined and standardized application processes to navigate the market efficiently. On the other hand, bank borrowers reported higher satisfaction with their lending experiences and expressed more optimism about navigating current conditions. However, they also raised concerns about lender reputations and delays caused by third-party involvement, such as regulators, which extend funding timelines.
Altus Group found that despite the more rigorous application processes faced by bank borrowers, their funding timelines are generally much shorter than those for non-bank borrowers.
The report also included insights from commercial real estate investors on how to improve the financing process. Both borrower groups called for more flexibility from lenders, increased automation in underwriting, and earlier preparation of appraisal data. Bank borrowers stressed the need for streamlined appraisal requirements and flexible term sheets, while non-bank borrowers emphasized the importance of faster data collection and better pre-screening of lenders.
As the gap between bank and non-bank borrowers continues to widen, securing financing in today’s uncertain market will require flexibility and speed. The Federal Reserve’s approach to easing monetary policy will play a critical role in how quickly lenders and borrowers regain confidence and move forward with deals. However, it may take months or even years before rate reductions translate into lower financing costs.
Source: GlobeSt.
Extend-And-Pretend Created A New Wave Of Loan Maturities
As rising interest rates have caused many commercial real estate (CRE) loans to approach default, borrowers and banks have been employing an “extend-and-pretend” strategy, where loan terms are renegotiated to avoid default and extend the timeline for repayment. However, a new research brief from Gray Capital, primarily focused on multifamily properties, suggests that this approach is coming to an end. Lenders and equity investors are growing frustrated with borrowers who have not yet secured additional capital or alternative financing to pay off their loans. They are eager to resolve the situation, as holding onto these increasingly risky assets is becoming unsustainable.
The strategy of “extend and pretend” has faced criticism. A report from the Federal Reserve Bank of New York noted that simply postponing financial issues in hopes of favorable rate changes is not a viable long-term solution. Instead, this approach has been increasing pressure on banks. In response, large banks have begun quietly offloading parts of their commercial real estate portfolios to avoid losses, particularly from office property owners who are unable to meet their mortgage obligations.
Gray Capital’s analysis, which incorporates data from the New York Fed and CoStar, predicts that a wave of loan maturities could peak in 2026 for CRE overall, with multifamily loans experiencing a surge in the third quarter of 2025. Gray also forecasts that the Federal Reserve will raise rates more gradually in the future, continuing to apply pressure on borrowers, particularly those with bridge or construction loans that have already been extended.
On a more positive note, Gray’s report sees signs of improvement in the multifamily market. Multifamily unit prices have increased, rising to about $200,000, up from a low of $175,000 in mid-2023. While cap rates have risen from 4.25% in early 2022 to 5.5% in 2024, they are expected to decrease in the coming years. CoStar’s projections suggest that loan maturities in the third quarter of 2025 will be 25% higher than their initial 2023 forecast. Additionally, multifamily construction is slowing, with fewer units being delivered and a sharp decline in new starts. This trend is leading to a more balanced supply and creating more opportunities for distressed investments.
Source: GlobeSt.
Small Multifamily Cap Rates Drop to 6%
The small multifamily market saw notable developments in the third quarter, with cap rates averaging 6.0%. This marks an increase of 31 basis points compared to the same period last year and a rise of 98 basis points from the cyclical low recorded in 2023. The risk premium above the 10-year Treasury yield also grew, climbing 42 basis points to 201, which reflects a return to pre-pandemic levels.
According to Arbor, Q3 represented a positive shift for the small multifamily sector, with signs of market normalization. Key factors contributing to this improvement include rate cuts by the Federal Reserve, which have helped enhance pricing, cap rates, and credit conditions. Additionally, easing interest rate pressures, strong rental demand in many markets, and strengthened lending from government-sponsored enterprises have further supported the industry.
The National Multifamily Housing Council shares a similar view, noting that markets are among the least restrictive since July 2020. Sales volume and equity financing have notably improved since October, and debt financing conditions are stronger. The CRE Finance Council also reported that 85% of those surveyed expect positive market impacts, marking the highest optimism since Q3 of 2022.
However, the market is experiencing some challenges, such as a significant increase in inventory, which has slowed rent growth and raised vacancy rates. Arbor believes the ongoing demand for affordable housing will help offset these impacts. In addition, as GlobeSt.com has noted, two factors could contribute to a rise in inventory: 1) the growth in new units is concentrated in the South and West, where demographic trends are driving development, and 2) new construction starts are expected to slow in 2025, allowing demand to catch up to supply.
Looking ahead, Arbor highlighted that futures markets predict the Federal Reserve will continue to cut rates through 2025. In a recent speech, Fed Chair Jerome Powell expressed confidence that the economy and labor market can remain strong while inflation steadily declines to 2%. He also indicated that the Fed is moving toward a more neutral policy stance, though the exact path remains uncertain.
Source: GlobeSt.
CRE Investors Brace For Impact As Walgreens Plans 1,200 Store Closures
Walgreens Boots Alliance‘s recent announcement to close 1,200 stores over the next three years, including 500 in 2025, has sent its stock plummeting to $10.45, less than half its value at the start of the year. This reflects broader struggles in the drugstore industry, where CVS has lost 28% of its value and laid off 3,000 workers, and Rite-Aid emerged from bankruptcy after slashing $2 billion in debt.
The impact isn’t just on investors. Commercial real estate (CRE) markets are also concerned, particularly regarding leased properties. Walgreens, with an estimated 8,700 U.S. stores, is closing 14% of them. CVS is closing 900 stores, and Rite-Aid 500. Factors such as competition from online and discount retailers, and the influence of pharmacy benefit managers, are pressuring profits.
While Walgreens’ real estate is generally considered high-quality, the scale of closures raises questions.
“What if lenders don’t want to refinance?” warned Jonathan Hipp of Avison Young, noting that property sales could become harder as cap rates rise and lender perceptions shift. Walgreens CEO also highlighted that 75% of its profits come from just 25% of its locations, suggesting more closures could follow.
A Trepp analysis revealed that Walgreens is a tenant in properties backing $3.69 billion in commercial mortgage-backed securities (CMBS), a major concern for CRE investors, lenders, and CMBS bondholders. Retail CMBS delinquency rates have risen, with Walgreens at 5.46%, CVS at 4.35%, and Rite-Aid at 11.82%.
These store closures are likely to have significant ripple effects across both the retail and real estate sectors in the coming years.
Source: GlobeSt.
CRE Loan Re-Defaults Hit Decade-High Levels
The classic saying, “If at first you don’t succeed, try again,” can be admirable in many situations. However, when it comes to commercial real estate (CRE) loans that borrowers struggle to refinance, the consequences can be more complex. As noted by the *Financial Times*, this approach has contributed to a significant rise in “double defaults,” with re-defaults soaring by 90% in 2024 compared to the previous year.
As loans near maturity or face missed payments, banks have leaned on what some call the “extend-and-pretend” strategy, or “delay-and-pray” for the more skeptical. This approach involves modifying loans, extending their terms, and hoping that the Federal Reserve will lower interest rates enough for borrowers to refinance before the situation worsens—essentially hoping to kick the problem down the road without affecting the bank’s balance sheet.
Loan modifications have surged in 2024, setting the stage for a record year in terms of total modifications. In 2023, banks modified $16.8 billion in loans, with an average monthly volume of $1.8 billion. April saw the peak, with $3 billion in modifications. By May 2024, the total reached around $22 billion, and $9 billion worth of loans had been modified just in that year alone.
However, this approach carries risks. A borrower who defaults, receives a loan extension or other relief, and later defaults again creates a cycle that increases the potential for financial instability. According to *Financial Times* analysis, data from BankRegData shows that the number of CRE borrowers receiving relief and subsequently becoming delinquent again is at its highest level since 2014.
The “extend-and-pretend” strategy has been criticized before. Following the 2008 financial crisis, many argued that the approach only delayed the inevitable. More recently, a study by the New York Federal Reserve cautioned that banks’ use of this strategy post-pandemic—particularly in CRE—has led to credit misallocation and increased financial fragility. By postponing necessary adjustments, the strategy has also crowded out new credit, causing a 4.8%–5.3% drop in CRE mortgage originations since the first quarter of 2022, and contributing to the looming “maturity wall,” which as of late 2023, accounts for 27% of bank capital.
Despite rising delinquencies, banks have been slow to offer substantive relief. According to Moody’s, banks have been reluctant to offer significant payment breaks, allowing borrowers only to delay missed payments. This has led to the impression that banks are simply “kicking the can down the road,” as Ivan Cilik, a principal at accounting firm Baker Tilly, put it. While banks are attempting to manage these troubled loans, Cilik emphasized that if interest rates don’t decrease, many borrowers will remain unable to meet their payment obligations.
Federal Reserve Chairman Jerome Powell has made it clear that there is no rush to reduce interest rates. In the press conference following the Federal Open Market Committee’s latest meeting, Powell signaled that there is no immediate plan to lower rates, meaning that relief for struggling borrowers may not come as soon as some had hoped.
Source: GlobeSt.
Strategies For Surviving The Wall Of Loan Maturities
The commercial real estate sector is facing an imminent surge in loan maturities.
With $5.9 trillion in commercial real estate debt currently outstanding, more than half of that total is set to mature within the next three years. In a typical market, this would represent a significant opportunity for lenders, but high interest rates and broader economic challenges mean that many borrowers will struggle to refinance as these loans come due.
However, borrowers have a range of options available, according to Ann Hambly, founder and CEO of 1st Service Solutions. She emphasizes that understanding these options is critical to navigating the upcoming wave of loan maturities.
Understanding Your Options
Many borrowers mistakenly believe they only have two choices when faced with a loan maturity: pay off the debt in full or hand the property back to the lender. In reality, Hambly explains, there are several other avenues borrowers can explore. These include extending the loan with additional capital, modifying the debt terms, raising funds, seeking a new loan, or even selling the property.
To properly evaluate these options, Hambly recommends working with a debt advisor. A skilled advisor, who is active in the market and familiar with all available solutions, can guide borrowers through the various possibilities.
Plan Ahead: Start Early
When it comes to finding the right solution, Hambly advises borrowers to begin the process at least a year before the loan matures. “We run financial models to evaluate different options, and it often takes time for the property owner to fully understand the best course of action,” she notes. If the potential solutions involve selling the property, raising capital, or securing a new loan, borrowers will need time to conduct due diligence on those options as well.
While some borrowers wonder whether it’s ever too late to explore their options, Hambly stresses that it’s never too late to start. “That said, being proactive and starting early is always the best strategy.”
Lenders Are Motivated to Negotiate
With over $3 trillion in commercial real estate loan maturities looming through 2028, borrowers aren’t the only ones feeling pressure. Lenders are also facing the challenge of managing maturing loans, and they are eager to avoid a flood of defaults. While borrowers have multiple ways to address their maturing debt, lenders are generally limited to two options: work out a deal with the borrower or take the property back.
In short, the current market conditions create both challenges and opportunities. Borrowers who are proactive, informed, and open to exploring a variety of options can navigate the upcoming wave of loan maturities more successfully, while lenders are equally motivated to find workable solutions that avoid defaults. By working with the right experts, borrowers can maximize their chances of securing a favorable outcome as their loans come due.
Source: GlobeSt.
Even Some Of The “Safest’ CRE Bonds Are Getting Hammered
In 2024, one thing has become abundantly clear in commercial real estate: even top-rated securities backed by high-quality real estate assets can collapse, leaving investors with significant losses.
It’s a hard lesson that many had hoped wouldn’t need to be repeated after the financial turmoil of the Great Recession.
The current wave of problems began in May when it became evident that investors holding the AAA-rated tranche of a $308 million loan tied to 1740 Broadway in midtown Manhattan were only able to recover 74% of their original investment after the loan was sold at a steep discount. Creditors in the lower tranches were completely wiped out.
Since then, Bloomberg has highlighted a series of similar high-profile investment failures involving properties and deals once thought to be solid. These deals, often structured as single-asset, single-borrower (SASB) bonds, have turned out to be riskier than expected.
Bloomberg‘s analysis of nearly 150 SASBs tied to U.S. office buildings showed that many creditors could receive only a fraction of their original investment. In some cases, even investors holding the AAA-rated portions of the debt are expected to suffer significant losses.
One notable example is 1407 Broadway, a 43-story office tower in Manhattan that had a strong lineup of corporate tenants. In 2019, the building’s owners issued bonds that earned a AAA rating—comparable to U.S. Treasury bonds in terms of safety. But things took a turn when the building’s owners failed to make an interest payment of over $1 million. As a result, Wells Fargo, acting as trustee for the bondholders, filed for foreclosure earlier this year.
The foreclosure filing outlined the failure to make required payments under the loan, including an unpaid interest payment in August 2023, and the non-payment of principal and interest due upon the loan’s maturity. The outstanding debt, including principal, interest, attorney fees, and other costs, amounted to $350 million.
Other troubled properties include River North Point in Chicago, where the A tranche is 28% underwater, and 555 W. 5th St. in Los Angeles, where 51% of the A tranche is in distress. On a more positive note, the Aspiria Office Campus in Overland Park, Kansas, has only started seeing issues with the C tranche.
The underlying issue with these loans is their structure. Unlike conventional CMBS loans, which are typically diversified across multiple properties, SASBs are tied to a single asset and a single borrower, concentrating risk. This makes these loans more vulnerable to issues affecting the specific property or borrower.
That said, not all of these loans are doomed to fail. There is still strong demand for loans tied to properties in prime locations with high-quality collateral, particularly when the assets are new and well-maintained.
Source: GlobeSt.