Distressed Properties See 43% Average Valuation Drop From Issuance

The average results were 140 basis points worse than at the end of 2023.

Conditions are getting tighter in commercial real estate. The Mortgage Bankers Association (MBA) has said that outstanding commercial mortgage debt grew in the first quarter of 2024 despite slow originations. Fewer loans are getting paid off or refinanced, so more debt sits on the books.

That speaks to what likely includes more distress, which could be why some big names in CRE are eyeing markets for opportunistic buying. Goldman Sachs analyst Caitlin Burrows thinks office markets have bottomed. Global Co-Head of Blackstone Real Estate Nadeem Meghji recently said liquidity is returning to markets, at least for good opportunities and those who have the capital to exploit them.

And all that depends on distressed properties to restart heavier transaction loads. CRED iQ recently looked at the decline in valuations for distressed properties. They have been steep and will offer bargains for well-heeled buyers, losses for "motivated" sellers.

CRED iQ examined properties that were reappraised in 2023 or 2024. Each property was either delinquent or was with a special server. These conditions allowed the firm to isolate distressed properties and compare valuations at issuance and in either 2023 or 2024.

The average was a fall of 43%. But that amount is 140 basis points worse than when CRED iQ did a similar analysis in the last quarter of 2023.

By property value: more than $100 million, -37%; $50 million to $100 million, -44%; $25 million to $50 million, -32%; $10 million to $25 million, -38%; $5 million to $10 million, -47%; and less than $5 million, -51%.

Those last few, least-expensive properties should be a particular warning sign. Over the last year, smaller properties have shown the least transaction reductions. They have also been considered safer for lenders than the big deals. But if they're being struck hard, they also likely have fewer resources to manage problems and may feel more pressure.

The three largest declines in distressed valuation were all in office, no surprise, with a 53% drop. Retail, which many analysts seem to have warmed to, was down 52%. Hotels had a 40% drop, multifamily stayed at a mostly flat 35% down from 2023 and industrial improved from 32% declines to only 10%.

Realistically, this analysis doesn't provide the breadth one might want to get a statistical representation of CRE markets in general. It's a bit heartening in a way because there isn't an obviously huge number of problematic properties that have plunged in value. If finding an abundant collection of examples were easy, the future would look a lot bleaker than it already does.

Source: GlobeSt/ALM