Distress Expected to Plateau at $200B

WASHINGTON, DC-Delta Associates will report this week some welcome news for the commercial real estate industry, namely that signs suggest the level of distressed properties will plateau at the $165-billion-to-$200-billion range. As of right now, the total value of distressed commercial real estate in the US has reached $186.9 billion, including properties in distress, foreclosure and lender REO, according to data from Real Capital Analytics. 

The office sector continues to represent the largest share of distress, at $47 billion, according to the report. In a change from the previous quarter, the apartment and hotel sectors traded places, with hotels now in second place with $36.6 billion in properties in default or foreclosure, plus lender REO, followed by apartments, which has $35.3 billion.

Distressed assets in the US have increased 12% ($20.1 billion) since Delta’s June 2010 report. In short, after a decline in June, the total is back to its March level.

There is a real likelihood that it won’t rise much further, though, Delta principal Greg Leisch tells GlobeSt.com. "Lenders are expressing enthusiasm for credit extensions,” he says. “Also the decline in commercial values seems to be over in most markets.  In fact, in some markets values are increasing. So deals that had been under water all of a sudden find themselves floating." 

Another factor in Delta’s analysis is preliminary 2nd quarter 2010 data from Foresight Analytics that indicates delinquencies for construction loans may have fallen for the first time since midyear 2006. The total delinquency rate fell from 19.6% in Q1 of 2010 to 19.2% in Q2. 

All of this is happening much faster than the real estate cycle-debacle of 1990, Leisch adds. Bottom line: "The wave of distress most experts thought would materialize in the half-trillion-dollar range is not going to happen." 

 To  be sure, there is still much pain in the industry, with bank failures and mortgage defaults continuing at a record pace. "So we are not out of the woods yet," Leisch says. 

When will the industry know for sure it is out of the woods, at least in terms of distressed assets? Next year will provide a good indicator, he says, since there are some $600 billion in loans coming due at that time, and experts are predicting up to 100 bank failures in the first two quarters alone. "We will have to see how the market and lenders handle that," he says.