Commercial real estate distress remains limited but has climbed a bit in recent months as the overall CRE CMBS delinquency rate was up almost 50 basis points from the beginning of the year and up about 200 bps year-over-year.
“The percentage of investors who are at least 30 days late on their payments has been rising, but this isn't a broad-based trend,” said John Chang, chief intelligence and analytics officer at Marcus & Millichap. “There are specific types of properties in specific markets that are starting to move into a more challenging position.”
The situation is becoming more challenging because lenders are policing loans more actively, according to Chang. Lenders that were content with so-called extend-and-pretend arrangements over the past couple of years are now requiring borrowers to refinance or sell properties, and in some cases, banks are selling notes to other lenders or initiating the foreclosure process. As such, properties with pre-existing loan terms – especially those underwritten with aggressive pro formas – are starting to be cleared off of lender balance sheets.
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Although Chang described this as more of a trickle than a wave, he noted the climate is shifting. Ironically, the property type with the most headwinds – office – had a CMBS delinquency rate of 10.3% last month, which is below its level at the end of 2024.
“While this is an elevated level compared to where it was from 2019 through the beginning of 2023 it's about on par with where it was in 2012 through 2013,” said Chang.
Industrial properties have had an exceptionally low delinquency rate at just 0.5% since 2022, said Chang. Meanwhile, retail CMBS loan delinquency remains elevated at 7.1%, where it has been since mid-2022 after peaking at 18.1% during the pandemic. Delinquencies have been on an upward trend in the lodging sector at 7.9%, which is elevated from the past few years but still well below the 24.3% delinquency rate in 2020.
Multifamily distress is also trending higher, sitting at 6.6% currently, which is about 200 basis points above the beginning of the year, but still well below the 16.9% record in 2010 and 2011.
Chang asked: “Does this mean we're entering a big wave of distress that investors have been waiting for?”
“Honestly, I don't think so. When you look at the areas being affected, they're very specific.”
Distress is predominantly concentrated in metros where investors were very aggressive in their underwriting, matched with aggressive lending with very low interest rates, largely driven by less experienced and often under-capitalized investors. Sun Belt markets like Dallas and Houston are seeing higher levels of distress, as are Phoenix and parts of Florida.
Although distress is not currently broad-based, there are some investment opportunities available. Chang said properties facing the most distress are those facing substantial deferred maintenance and other challenges and investors willing to take on those challenges may find opportunities.
Chang said the market experienced a modest surge in closed transactions during the first quarter, reflecting lower interest rates and some recovery of investor optimism.
“The outlook for the second quarter faces increased headwinds as the market contends with generally higher interest rates and investor uncertainty, but that said, several investors that I've spoken with recently are still committed to placing capital and getting deals done, and the enthusiasm increases whenever those rates dip,” said Chang. “The long-term drivers supporting most types of commercial real estate remain sound, and many investors are still purposely engaging the investment market.”
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
