Where the Highest Levels of CRE Distress Are Right Now

Distressed CRE loans continue to rise, according to CRE data, analytics, and valuation firm CRED iQ, which reports that most of the top metropolitan statistical areas saw significant jumps of up to 2.5%.

“There were 42 markets with increases in CRE distress, equal to 84% of the 50 largest MSAs,” wrote the firm. “The average increase in distress was approximately 80 basis points. Notable markets with the largest increases in distress this month included Minneapolis (+2.5%), Jacksonville (+2.0%), and San Antonio (2.0%).”

Meanwhile, the New Orleans (-1.8%) and Louisville (-1.1%) MSAs were among the few markets that exhibited month-over-month improvements in distressed rates during April 2023, it said.

Those 50 largest MSAs represented 56.9% of the country’s population, using Census Bureau figures from July 1, 2021.

CRED iQ noted that as of April 2023, the MSAs that were already experiencing the highest rates of CRE loan distress were also the ones seeing the highest increases in distress. The upper levels are eyebrow-raising.

“Last month, CRED iQ focused on the Minneapolis MSA, which ranks as the market with the highest overall level of distress among the 50 largest MSAs — equal to 25.2%,” the firm wrote. “This month, a significant increase in distress in the Chicago MSA moved the market into position for the second-highest rate of commercial real estate distress. In April 2023, Chicago exhibited a 1.3% month-over-month increase in the percentage of distressed CMBS loans, which was one of the 10 largest increases among the 50 largest MSAs.”

In terms of highest total distress rates, after Minneapolis come Chicago (10.8%); Birmingham, Alabama (10.7%); Milwaukee (10.5%); and Cleveland (9.4%).

This doesn’t mean all the properties are on the block. The measurements of distressed loans include specially serviced, delinquent, or a combination of both. But it does show serious issues.

Conditions become clearer and also more worrisome with breakouts by property type. As anyone in the industry might guess at this point, office faced the highest levels of increased loan distress. Atlanta’s office sector saw a 16.5% increase in distress, while San Antonio and Jacksonville saw jumps of 13.2% and 6.8% respectively.

The March-to-April increases at the top end were driven by some large properties: a 2.2 million square foot suburban office portfolio for which the $350 million mortgage transferred to special servicing in mid-March. San Antonio’s Brass Professional Center, a 575,771 square foot suburban property with a $56.3 million mortgage also transferred to special servicing in March. Of interest here is that these were suburban, not central business district, properties.

The hotel sector also saw pressure in Memphis, Jacksonville, New York City, San Francisco, and Philadelphia. These were due to a “$982 million mortgage transferred to special servicing in April 2023 ahead of its June 2023 maturity date.