Distress in the commercial real estate (CRE) industry is on the rise, perhaps even more quickly than market participants had expected. According to a report issued last week by MSCI Real Assets, the amount of distressed assets in the CRE industry rose by 10% in the first quarter of 2023 to nearly $64 billion, a concerning sign for what’s to come. Not surprisingly, office buildings and malls appear as the most troubled asset sectors and, while distress in the retail estate sector appears to be cooling, the same cannot be said of office assets as the hybrid-work revolution appears here to stay. Instances of borrowers in the office space voluntarily turning over the keys to lenders is an increasingly common occurrence. According to recent articles, real estate investors have a steadily dimming view of downtowns, including with respect to bonds linked to public transportation and CMBS.
Distressed real estate asset sales in cities across the country are accordingly picking up steam, with New York, Los Angeles, and Houston leading the pack. Whether distress will be primarily limited to just the retail and office sectors is the question many are seriously considering as interest rates continue to rise and credit markets remain tight. The challenging environment is also creating opportunities for investors to acquire properties and debt at a discount.
Planning ahead, evaluating contingencies, reviewing the key terms in applicable agreements, and considering the various options from the perspectives of all sides is more critical than ever.