The Delinquencies and Distress Are Here
A CRED iQ analysis shows that conditions in many metros tipped in February.
People in CRE have been wondering when the impact of macroeconomics and financial realities would mark the arrival of distressed properties.
An analysis by CRED iQ of the close to 400 metropolitan statistical areas in the US, with more than $900 billion in outstanding CRE debt, suggests that the answer is now.
Distress became more prevalent in a majority of primary markets during February 2023,” the firm wrote. “Of the 50 largest MSAs tracked by CRED iQ, 34 of those markets exhibited comparatively higher levels of distress in commercial real estate loans than one month prior. The average month-over-month increase in distressed rates for these 34 markets was approximately 21 basis points. The Birmingham, AL MSA (+1.0%) exhibited the highest month-over-month increase in distress. Other notable markets with increased levels of distress this month included Pittsburgh (+0.8%), Memphis (+0.7%), and Los Angeles (+0.7%).”
There were 16 MSAs that showed better month-over-month distressed conditions, including Portland (a 2.4% reduction), Cleveland (-2.3%), and San Francisco (-1.7%).
Office was one of the driving factors for distress, as anyone who has been monitoring the CRE markets and property types might have guessed. Three areas hit particularly hard by month-over-month were Birmingham, AL (+4.6%), Columbus, OH (+4.3%), and Memphis (+4.1%). Birmingham, for example, saw a loan secured by the 211,257-square foot Chase Corporate Center go into default and then a transfer into special servicing status. “Refinancing efforts may have been hindered by the relatively short remaining lease term of the property’s largest tenant, Cigna, which accounts for 34% of the property’s GLA,” said CRED iQ. “Cigna’s lease is scheduled to expire in November 2024, less than two years after loan maturity.”
Hotels also weighted heavily on markets, as five of the top 10 increases in distress were associated with the property type. “The lodging sector for Birmingham, AL exhibited the sharpest increase (+9.2%) in February following the special servicing transfer of a $10.4 million loan secured by Hotel Indigo Birmingham due to imminent monetary default,” the report said. “Additionally, two Virginia Beach hotel loans with the same sponsor, totaling $22.2 million, became 30 days delinquent in February. The delinquencies contributed to the distressed rate for the Virginia Beach hotel market increasing by 5.0%.”
Still, distress in one place does not mean equal problematic conditions in another. The highest overall distressed rate was 20.7% in Minneapolis. Rounding out the top five were Birmingham (11.4%), Milwaukee (8.9%), Cleveland (8.4%), and Charlotte (7.9%).
On the other hand, Salt Lake City had the lowest percentage of distress, at 0.1%, followed by Sacramento (0.3%), Dallas (0.6%), and Boston (0.6%).