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Troubled CRE Is Tapering While Sales Out of Distress Increase

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The total amount of distressed CRE reached more than $88.6 billion by the end of 2024’s first quarter through the addition of net $2.7 billion, according to a new MSCI capital trends report.

The net addition was the result of $9.9 billion new property distress offset by $7.2 billion worked out during the quarter.

For current distress, office is far and away the largest property type example, with almost $38.2 billion. That’s followed by retail’s nearly $21.9 billion, roughly $14.2 billion in hotels, about $10 billion in multifamily, $1.6 billion in retail, and $2.8 billion in other types.

More than half of the new distress was office. Retail was the only category in which there was a net reduction in distress, with $1.5 billion in additional properties and $1.9 billion in workouts during the quarter. One deal — Kerring’s $963 million purchase of the retail space at 717 Fifth Ave. — brought the “share of troubled asset sales to 8.9% for the retail sector,” MSCI wrote.

“While the net addition of distress has tapered over the past three quarters, sales out of distress have increased,” the firm said. “Troubled asset sales accounted for 3.9% of all deal volume in the first quarter of 2024. The last time distressed sales constituted this large a share of the total market was in late 2015, with the sale of Stuyvesant Town/Peter Cooper Village in New York.”

While distressed sales have spiked, a similar amount was seen in 2018. As a share of total sales, the last time they reached this point was in 2016.

More concerning is potential distress, which MSCI defines as indicating “possible future property-level financial trouble due to events such as delinquent loan payments, forbearance and slow lease up/sell out, among others. This also includes CMBS loans placed on master servicer watchlists.”

Total potential distress at this point is $205 billion. Multifamily leaps ahead of even office ($50.3 billion) in this category with $56.1 billion. Hotel sits at $28.6 billion; retail is $28.4 billion; industrial is $27.1 billion; and other types come to $15.3 billion.

It’s important to remember that potential distress isn’t the same as a projection of what will happen. Instead, it’s a calculation of what might happen, with a lot of time and space for that to change for the better or worse.

Total current distress is highest in the Northeast at $29.0 billion. Second highest is the West, with $16.3 billion. Then, in volume order, come the Midwest ($13.2 billion), Mid-Atlantic ($10.9 billion), Southwest ($9.8 billion), and Southeast ($9.4 billion).

 

Source:  GlobeSt.

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Distress Levels Hit $85.8B In 2023

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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.

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Distressed CRE Reaches Ten-Year High

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Distress has been the buzzy question making the rounds of commercial real estate for more than a year now. When will it really start? When will the falling prices finally bring in the large mounds of capital that have been waiting on the sidelines?

When will the gift wrapping get shredded? The boxes surrounding presents of cheap properties ripped open? The prices turning into big profits when interest rates eventually fall and values finally climbing back up?

GlobeSt.com has previously reported that a secret round of distress might be behind a lot of CRE market performance. MSCI released its U.S. distress tracker and it’s helping to put some surface on the bare bones of distress.

“The balance of distress in the U.S. commercial real estate market climbed for a fifth consecutive quarter to total $79.7b at the end of September,” they wrote. “This figure, which includes both financially troubled and bank owned assets, has not swelled to such a level since 2013, when the fallout from the Global Financial Crisis was working its way through property markets. Still, the current distress level remains less than half that reached during the height of the GFC.”

The actual outstanding distress through the third quarter of 2023 has reached $79.7 billion, though not evenly distributed by property type. As anyone in the industry might guess, the largest single source of distress right now is office, at about $32.5 billion, or almost 40.8% of the total. Retail is in the number two spot: $21.2 billion, or 26.6% of the total. Then comes hotel, 17.9% of all the distress at about $14.3 billion.

The bottom three categories are apartment/multifamily ($7.5 billion, 9.4%), other that includes sectors like self-storage and manufactured housing ($2.5 billion, 3.1%), and industrial ($1.7 billion, 2.1%).

However, the real concern for investors, developers, and owners should be what might come. “Potential distress is indicative of financial stress that, if not reconciled, has the potential to become full-blown financial trouble,” MSCI wrote. But the biggest danger isn’t office but multifamily, at $65.7 billion, or 30.4% of the $215.7 billion total.

But the possible exposure of office is still enormous, at $50.3 billion or 23.3%. Hotel’s $31.1 billion/14.4% comes next, after which are retail ($30.7 billion, 14.2%), industrial ($26.7 billion, 12.4%), and other ($11.3 billion, 5.2%).

“The composition of ownership for distressed assets shows that one-third of the balance of distress is tied to assets owned by private capital, while another third is associated with institutional investors,” they wrote. “Rather than by value, which skews towards institutional ownership, a look at the ownership composition by the number of assets indicates that private investors own 50% of the assets currently classified as distressed.”

 

Source:  GlobeSt.

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