The commercial real estate sector has been abuzz with anticipation, with many investors waiting on the edge of their seats for a significant wave of distressed property deals to hit the market. The idea of snapping up properties for pennies on the dollar has driven much of this excitement. However, according to industry experts, such an opportunity may not materialize to the extent many have hoped.
Contextualizing the Rise in Distress
John Chang, Senior Vice President of Research Services at Marcus & Millichap, recently addressed this in a research video, noting that while distress in the market is undeniably rising, it may not qualify as the anticipated wave of opportunities. "I think a lot of investors are still anxiously waiting for the flood of distressed deals," Chang said. "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."
Indeed, recent data from MSCI indicates a significant increase in multifamily distress, climbing from 2.6% in January to 7.4% in June. However, Chang emphasizes the importance of context. This statistic includes a considerable amount of both performing and non-performing mature debt, such as loans that have come due but are still under negotiation, as well as loans in special servicing that are current.
Lenders' Strategic Approach
Chang points out that the "extend-and-pretend" model, where lenders extend loan terms and pretend the issues will resolve, remains in play. Yet, there is a shift as lenders begin to phase out this practice. "And remember, just because a property is technically in distress doesn't mean it will come to market as a foreclosure or a significantly discounted fire sale," Chang added.
Rather than offloading distressed properties in a rush, it appears that some lenders are adopting a more strategic approach. High-risk properties, particularly poorly performing office buildings and weaker retail properties, are being quietly removed from balance sheets through loan sales. Conversely, certain banks are choosing to retain and operate properties in well-performing categories such as industrial, some types of retail, medical office, and apartments, awaiting an increase in their value.
Limited Forbearance and Strategic Retention
This cautious and deliberate strategy by lenders means that the anticipated flood of distressed deals is not happening. "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," Chang explained.
Positive Macroeconomic Trends
Delinquency rates, while rising, remain low by historical standards. Chang also highlighted some positive macroeconomic trends. "It looks like we're on the backside of the high inflation, high interest rate cycle," he said. "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."
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