012. Financial Troubles Mount: Notable Players Hit by Distress in CRE Market

Episode Transcript:

According to a recent report by MSCI Real Assets, the much-anticipated wave of distress is inching closer, with a staggering $64 billion worth of distressed assets emerging in the first quarter of 2023. 

In a disconcerting escalation, the first-quarter total witnessed a 10% rise compared to the previous quarter. What's more concerning is that approximately $155 billion of CRE assets now find themselves at the precipice of distress, according to the report. The retail sector bears the brunt of the crisis, with around $23 billion of retail properties teetering on the edge of distress as of March. It's worth noting that retail had already been struggling before the pandemic, and the shift to online shopping further compounded its woes.

But it doesn't end there. Office properties, to the tune of $18 billion, face their fair share of distress. The weakened demand for office space continues to haunt the sector, as remote work remains a prominent fixture in the post-pandemic work landscape. With many office workers operating from the comfort of their homes for at least a few days a week, and certain industries, notably the tech sector, implementing workforce reductions, the demand for office space has dwindled.

Distress in the commercial real estate market isn't just confined to specific sectors. Even the much-sought-after multifamily segment is not immune. The Mortgage Bankers Association reports an uptick in Commercial Mortgage backed securities delinquency rates for multifamily loans among major investment groups. The delinquency rate stood at 3% at the end of the first quarter, a slight increase from 2.9% in the previous quarter and 2.77% in the third quarter of last year. This distress in the multifamily space has prompted some notable players to halt payments. Veritas Investments, the largest multifamily landlord in San Francisco, has stopped making payments on roughly one-third of its local holdings, leading its lender to market approximately $1 billion in delinquent loans.

These figures are alarming, and they're accompanied by anecdotal evidence that further paints a troubling picture. In New York, Columbia Property Trust's office portfolio has witnessed a 30% drop in value after defaulting earlier this year. And the financial distress extends beyond office properties. Brookfield, a prominent player in the industry, finds itself grappling with financial troubles at eight of its shopping mall properties, as well as offices in Los Angeles and Denver.

The commercial real estate market is navigating rough waters, and the signs of distress are mounting. As we continue to monitor this evolving situation, it's crucial for investors, lenders, and industry players to stay vigilant and adapt their strategies accordingly. The road ahead may be challenging, but by proactively addressing these issues, we can work towards a more stable and resilient commercial real estate landscape. Stay tuned for further updates as we closely follow these developments.

This is Tyler Cauble, signing off