Bankruptcy Bingo is the Latest Headwind for CRE

Corporate bankruptcy is never a happy thing, particularly for vendors who find that they may be forced by courts into financial haircuts. That has repercussions for the businesses of those vendors, including landlords.

And according to S&P Global Market Intelligence, bankruptcy filings in the first four months of 2023 hit the highest pace since 2010. “S&P Global Market Intelligence recorded 54 corporate bankruptcy petitions in April, a drop from 70 in March. Those fresh filings have pushed the year-to-date count to 236, more than double the comparable figure a year ago and higher than any of the prior 12 years,” the firm wrote.

March’s 70 is reminiscent of the 2020 June and July numbers.

As the New York Times underscores, that’s just through April and so doesn’t include Vice Media, Cox Operating. Or K.K.R.-backed Envision Healthcare.

The sectors with the highest filings so far have been consumer discretionary (30), industrials (23), financials (18), healthcare (18), and information technology (9). So, retail, industrial, office, and medical office being some of the most obvious property sectors that could be affected.

Things could get a lot worse. Markets Insider reported a Bank of America estimate that a recession and credit tightening could kick off an 8% corporate default rate that would represent $920 billion. And as much as a 15% default rate on corporate debt was a “distinct risk.”

“If a full-scale recession doesn’t arrive in the next year or two, the cycle will get delayed, but not canceled,” wrote Oleg Melentyev, head of high-yield credit strategy at Bank of America Merrill Lynch, in a client note earlier in May. “For now, we continue to think that a mild/short recession is a more likely outcome than a full-scale one for the foreseeable future. Therefore, we assume a moderate pace of loss-gathering is already underway, but it has not yet reached a point of a lift-off to take us to 8% aggregate across all credit.

The implications for CRE are significant, both direct and indirect. A chapter 11 restructuring could result in writing off signification past-due rent payments and possibly seeing locations close (Bed Bath & Beyond is selling off its assets and shuttering all its stores).

But then there are the indirect implications as well. When major businesses file for bankruptcy, that can affect many vendors, all of whom are now short of revenue and potentially at risk of being slow on payments in turn.