Distressed CRE Properties Top $64 Billion As "Full-Blown Trouble" Ahead

Tyler Durden's Photo
by Tyler Durden
Friday, Jun 23, 2023 - 12:55 PM

In yet another sign that a commercial real estate crisis has arrived, a new report from MSCI Real Asset reveals that distressed properties are piling up as some building owners of malls and office spaces have no choice in a high-interest rate environment but to default. 

The report, which Bloomberg first reported, shows the number of distressed assets increased by 10% in the first quarter to nearly $64 billion. The report notes distressed CRE assets could balloon to as much as $155 billion. 

These distressed assets are unable to refinance while regional banks are tightening credit standards amid a period of high borrowing costs -- and couple that with sliding CRE prices and some properties, such as office space and malls, where vacancy rates are soaring. 

"Should this potential distress be upgraded to full-blown trouble, an increase in distressed asset sales and declining prices would be inevitable," MSCI Real Assets analysts Jim Costello and Alexis Maltin wrote in the report. 

At the end of the first quarter, there were about $23 billion in distressed CRE retail properties and $18 billion in office buildings. The report highlighted another $43 billion of potential distress emerging in the office space segment as companies shrink corporate footprints. 

The analysts found Manhattan had the most distressed CRE asset sales with $2.6 billion of deals — or 19% of US transactions in the 12 months through May. Los Angeles was second with $746 million of distressed asset sales, followed by Houston with $465 million. 

None of this should be surprising to readers, as we outlined months ago "CRE Nuke Goes Off With Small Banks Accounting For 70% Of Commercial Real Estate Loans." 

And have shown CRE prices have slid for the first time in more than a decade. 

And what's worse is a multi-trillion-dollar CRE debt maturity wall over the next five years. 

We suspect when MSCI Real Assets releases the second quarter report, the CRE space will have deteriorated even further as just recently:

The CRE dominos are falling.