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: “Troubled CRE Is Tapering While Sales Out of Distress Increase“
