CRE distress and defaults in this cycle will be caused by the following issues:

Higher interest rates and the inability of the borrower to refinance at these higher rates
A reduction in occupancy, revenue and NOI and inability for the borrower to cover the current debt service on the property
Mortgage loan and covenant breaches
Inability to make required payments and escrows under the note and mortgage
Higher and in some cases prohibitive costs to eliminate interest rate risk from floating rate loans with an interest rate swap or collar
A significant decline in the value of the property
A reduction in the occupancy of the property and loss or bankruptcy of major tenants

With all the above issues currently affecting about 2.0% or $90 billion of the total CRE loans outstanding of $4.5 trillion, there is a great opportunity for distressed investors to contact the various CRE lenders and seek to acquire the note and mortgage on the property at a significant discount. If the average defaulted loan is $25 million, there will be 3,600 distressed deals during the next two years from which to choose. Since today's distressed investors are accepting higher risk by buying the note/mortgage and then going through the foreclosure process, which would normally be done by the original lender, the discount on the loan paper has to be an additional 10%-15% than if the property was sold by the lender as a foreclosed asset.

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Opportunities Open Up for Investors Looking for CRE Distress

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