Office and retail properties account for majority of new distressed loans in September
The commercial real estate sector continues to grapple with rising loan delinquencies and financial strain, as new data from KBRA revealed an uptick in distressed properties in September.
The latest report highlighted a growing number of troubled commercial mortgage-backed securities (CMBS), with the delinquency rate for KBRA-rated private-label CMBS climbing to 5.32%, up from 4.98% in August. While the increase in the distress rate, which includes loans in special servicing, was smaller at 8.52%, the office sector remained under the heaviest pressure, breaching the 12% mark for the first time.
Newly distressed loans totaling $1.6 billion were added to the tally in September, with office buildings accounting for nearly 39% of that figure, or $608.5 million. The retail sector wasn't far behind, contributing 34.4% of new distress at $542.2 million, while industrial properties represented 8.5%, or $133.7 million. A significant portion of the distressed loans was due to imminent or actual maturity defaults, reflecting the broader difficulties facing the commercial real estate market as interest rates remain high and refinancing becomes a challenge.
Although office properties continue to struggle, there was a silver lining as six distressed office loans were fully resolved in September, totaling $137.9 million. Notable cases included Excelsior Crossing, a loan with no loss on its original $88 million balance, and HSBC-Brandon, Fla., where the loss hit 53.5% on a $17.8 million loan. Despite these resolutions, distressed office loans still amount to $11.3 billion.
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Retail properties experienced the sharpest rise in distress, increasing by 41 basis points to 8.51%. Among the most significant new retail loans added to the distress pool were Colorado Mills at $118.9 million and Coastal Grand Mall at $99.3 million.
Meanwhile, multifamily properties stood out as a rare bright spot, seeing the largest improvement in their distress rate, which fell by 30 basis points to 7.2%. Despite this decrease, the total amount of multifamily distress remained mostly unchanged month-over-month. The reduction in the distress rate was largely driven by new issuance activity in the multifamily space.
Overall, the commercial real estate market continued to experience challenges, with a rising number of distressed properties across key sectors, especially in office and retail. However, the resolution of some distressed office loans may signal that valuations in the office market have reached a point where transactions between sellers and buyers are becoming more feasible.
KBRA’s report analyzed $329.1 billion worth of US private-label CMBS, including conduits, single-asset single-borrower (SASB), and large loan transactions.
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