Distress: Not Widespread Yet But on the Rise
Hospitality was the asset class most impacted by distress activity at 7.2% of total sales.
The topic of distressed properties as a potential investment target has been prevalent over the past several months, but sales data suggests distress isn’t yet as widespread as many think.
According to an analysis by Colliers director of research for U.S. Capital Markets Aaron Jodka, distress sales have averaged $2.1 billion per quarter since the beginning of 2023. This is below the quarterly average of $2.2 billion from 2017 to 2019 and is much lower than the amount that occurred during the Global Financial Crisis of 2008.
“Based on this metric, distress isn’t widespread; it’s normal,” said Jodka, noting distress has been limited since the pandemic began. “However, it is on the rise, with newly troubled loans running at a pace 5x pre-pandemic.”
Hospitality was the asset class most impacted by distress activity at 7.2% of total sales. Office ranks second at 3.8%. The industrial sector has shown minimal with only $1.7 billion outstanding, compared with $41 billion outstanding in the office sector for the second quarter.
Distress is a viable investment target, with numerous properties selling at steep discounts to their previous sale price and well below replacement costs, said Jodka. He encouraged investors to remain vigilant as the potential for distress opportunities remains across all asset classes.
According to MSCI, multifamily has the highest share of potential distress at nearly $71 billion, followed by office at $67 billion, as well as retail, hospitality and industrial totaling between $32 billion and $36 billion.
The top five markets in terms of distress are Manhattan with $17.2 billion currently in distress, San Francisco and Chicago both with $7.2 billion each, Los Angeles with $4.4 billion and the New York City boroughs with $3.7 billion, the analysis said.
“It’s important to note that differences exist from market to market,” said Jodka. “For example, although San Francisco and Chicago have similar totals, the factors driving them vary significantly. Chicago is propelled by office distress, while San Francisco is dominated by multifamily.”
Understanding where distress is today and where it will emerge in the future will be crucial in helping investors unlock acquisition targets, he added.