Is a Wave of Distressed Deals Ever Going to Come?

The commercial real estate industry has been on the edge of its seat waiting for a wave of distressed deals to hit the market. To be sure, distress has been rising, as recent figures by MSCI show. But does it qualify as a wave? Some experts say no.

“I think a lot of investors are still anxiously waiting for the flood of distressed deals,” said Marcus & Millichap SVP of research services John Chang in a research video. “They see it as an opportunity to acquire properties for pennies on the dollar, but I don’t think an opportunity of that magnitude will emerge.”

Much of the chatter about distressed property deals is based on a recently discussed statistic that multifamily distress has tripled, which is true, noted Chang. Looking at the underlying data, multifamily distress has climbed from 2.6% in January to 7.4% in June.

However, that data includes a large chunk of performing and non-performing mature debt, including loans that have come due but the owner is still negotiating with the lender, as well as loans in special servicing that are actually current, he said.

“I think the extend-and-pretend model is still in play in many cases, but from what I hear, lenders are starting to phase that out,” said Chang. “And remember, just because a property is technically in distress doesn’t mean it will come to market as a foreclosure or as a significantly discounted fire sale.”

Instead, it appears some lenders are quietly clearing high-risk properties off their balance sheets by selling off loans that pose a high risk, many of which are poorly performing office buildings and weaker retail properties. On the other hand, some banks are opting to continue to operate properties rather than sell them off, apparently waiting until values climb, said Chang.

“That’s a bit unusual, but it basically appears that banks are offering much less forbearance, and they’re holding owners’ feet to the fire on properties in well-performing categories like industrial, some types of retail, medical office and apartments.”

Chang said delinquency rates are still low by historical standards, and there are some positive macroeconomic trends to keep in mind.

“It looks like we’re on the backside of the high inflation, high interest rate cycle,” said Chang. “We’re not through it yet. There are still some headwinds and some choppy water ahead for us, but it does look like we’re through the worst of it, and the market is beginning to turn.”