Home Commercial Report: Troubled Commercial Real Estate Assets Across US Reach $64B in Q1’23

Report: Troubled Commercial Real Estate Assets Across US Reach $64B in Q1’23

MSCI Real Assets, Los Angeles, distressed troubled commercial real estate assets
Photo by Simone Hutsch on Unsplash

By The Registry Staff

The US commercial real estate industry is facing a growing sense of distress, as troubled assets reached nearly $64 billion in the first quarter of this year. According to a recent report by MSCI Real Assets, the amount of distressed assets increased by 10 percent during the first three months of the year. The report also highlights looming risks, with approximately $155 billion worth of commercial property assets that are potentially troubled.

The commercial real estate industry has been hit hard by higher borrowing costs, leading to a decline in prices and prompting some owners to default. A significant portion of the potential distress can be attributed to buildings that require refinancing at a time when lenders are tightening credit, following the collapse of several regional banks, according to a report in Fortune.

The MSCI Real Assets researchers, including Jim Costello and Alexis Maltin, expressed concern in their report, stating, “Should this potential distress be upgraded to full-blown trouble, an increase in distressed asset sales and declining prices would be inevitable.”

Among the different types of real estate, retail properties, particularly malls, faced the most significant challenges, with nearly $23 billion of distressed assets tied to this sector. Office buildings were also heavily impacted, with approximately $18 billion considered distressed as of March-end.

Offices are facing additional struggles due to weakened demand caused by remote work and job cuts. They account for nearly $43 billion of potential distress, the highest among all sectors. The report suggests that offices face a larger wave of maturing debt, while distress in the retail sector appears to be stabilizing.

In terms of distressed asset sales, Manhattan emerged as the most active market, with $2.6 billion in deals, representing 19 percent of all US transactions, in the 12 months leading up to May. Los Angeles ranked second with $746 million in deals, followed by Houston with $465 million in distressed transactions, according to MSCI Real Assets.

MSCI defines “distressed” properties as those in bankruptcy, default, court administration, liquidation, or experiencing significant tenant distress. It also includes properties with commercial mortgage-backed securities transferred to a special servicer. Potentially distressed properties encompass real estate facing delays in reselling or leasing, debt listed on a CMBS watchlist, properties under forbearance, or those delinquent on payments.