Updated: Sep 17
In the ever-evolving landscape of commercial real estate, staying informed about lender and borrower trends is essential for success. Recent reports from the Kroll Bond Rating Agency (KBRA) shed light on the state of distressed commercial real estate loans, offering valuable insights for industry professionals and investors. Let's take a closer look at the findings and what they mean for those involved in the real estate game.
**The Distressed Loan Landscape**
KBRA's research indicates that distressed loans within private-label commercial-backed mortgage securities (CMBS) have been on the rise over the past year. As of August 2023, distressed loans accounted for 6.8% of CMBS, totaling an astonishing $40.7 billion. This represents a significant increase from the 4.5% recorded at the close of the second quarter in 2022. In just over a year, delinquencies and specially serviced volumes among CMBS deals issued since 2010 surged by $13.4 billion.
One striking observation is that loans to retail businesses continue to face the highest level of distress among all commercial real estate (CRE) sectors, with a distress rate of 9.8%. This figure has grown incrementally from 9.3% in June 2022, signaling ongoing challenges in the retail industry.
Meanwhile, the office sector, which has been profoundly impacted by remote and hybrid work policies, reported a distressed rate of 8% by the end of August 2023. This sector has experienced the most significant shift, with its distress rate standing at just 2.9% a mere 15 months earlier. The outstanding distressed office-sector balances have accelerated by 59% over that timeframe, reaching $13 billion.
**The Impact of Remote Work Policies**
The surge in distressed office loans is closely tied to the ongoing impact of remote and hybrid work policies. As the work landscape evolves, many companies have reevaluated their office space needs. Notably, tech giants like Meta and Amazon have signaled their intentions to track employee in-office attendance following Labor Day. This shift underscores the continued uncertainty surrounding the future of office space utilization.
**Implications for Lenders and Borrowers**
For lenders and borrowers in the commercial real estate market, these trends suggest the need for adaptability and proactive strategies. Lenders should carefully assess the risk associated with different sectors and borrowers, particularly those in retail and office spaces. As distressed loans rise, lenders may need to consider more flexible terms and creative solutions to support struggling borrowers.
On the borrower side, it's crucial to navigate these trends with a forward-thinking approach. For those in the retail sector, finding innovative ways to revitalize and adapt their businesses may be necessary. Meanwhile, office space tenants and owners should continue to explore flexible workspace solutions and adapt to the changing demands of the workforce.
In a dynamic market, staying informed about the latest trends and data is essential. The recent surge in distressed commercial real estate loans, especially in the retail and office sectors, underscores the need for both lenders and borrowers to be proactive and adaptable. As the industry continues to evolve, those who embrace change and strategic innovation are more likely to thrive in this shifting landscape.
At Fast Money for Flips, we're committed to providing timely insights and financial solutions to help you navigate the ever-changing real estate market. Stay tuned for more updates on industry trends and expert advice to support your real estate ventures.