Impending Surge in Distressed Commercial Real Estate Sales
According to Colliers and MSCI data, sales of distressed commercial real estate assets have been limited in recent years, both in terms of the percentage of deals and dollar volume. However, Colliers predicts that this trend will soon change, with a spike in the number of distressed sales anticipated. Although the exact size of this wave is unclear, MSCI has estimated that over $2 trillion in debt maturities are due by 2027, and refinancing is now more difficult and costly than it was in the past.
The Federal Reserve is unlikely to reduce interest rates or engage in quantitative easing, given the current high inflation rates. Furthermore, following the sudden and dramatic bank failures in March, banks are now more cautious and tightening their lending standards. Special servicing rates are also increasing and are higher than delinquencies, indicating that distress may be on the horizon.
Colliers Research Director of U.S. Capital Markets, Aaron Jodka, anticipates that distressed sales will primarily involve office properties, as these face higher vacancy rates, making it more challenging for owners to meet their debt obligations. Multifamily properties, which Peakview Investments is primarily focused, are also likely to be affected, given the increasing expenses, underperforming business plans, and floating-rate debt that these properties typically have. The March delinquency numbers by MSA and sector, produced by CRED iQ’s database, is summarized in the following table:
MSCI data from 2022 shows that distressed-asset sales amounted to $7.9 billion, down from $10.9 billion in 2021, and only about 1% of the deal volume was related to distress. The last peak in distressed deal volume was in 2010, at 18.7%, while the last peak in distressed sales by dollar volume was in 2011, at $36.2 billion. However, Colliers predicts that the coming years may see a record amount of future distress, and there is currently a large amount of opportunistic, value-add, and debt capital waiting to take advantage of these distressed assets.
