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Distressed CRE Debt Doubles But Still Isn't The Tsunami Feared Last Year

The percentage of nonperforming commercial real estate loans held by the largest 325 U.S. banks more than doubled from the beginning of 2020 to the beginning of 2021, Green Street reports, citing TreppBank Navigator data.


At the beginning of 2021, 0.86% of the commercial mortgages on the balance sheets of the largest U.S. banks were nonperforming, up from 0.41% a year earlier. Even so, the amount of bum CRE debt isn't even close to what banks held during the worst of the Great Financial Crisis in 2010, when nonperforming CRE debt peaked at 8.6%.

Total distressed real estate totals $17.5B out of total real estate assets of about $1.783 trillion held by the banks, according to Green Street. Of the nonperforming loans, most ($12.2B) are commercial mortgages, while $2.3B are nonperforming construction and land loans and $900M are nonperforming multifamily mortgages. Banks are also holding about $2.1B in foreclosed properties.

The difference between levels of bad CRE debt during the financial crisis and the coronavirus pandemic is attributable to a number of factors, Green Street posits, including the U.S. government and the Federal Reserve's flooding of the market with liquidity since the beginning of the pandemic. 

Forbearance and other modifications of loans, which were officially encouraged in 2020, meant that banks haven't had to classify some loans as nonperforming that otherwise may have been. And in the years since the Great Recession, many banks have been in the habit of offering lower-leverage loans and holding higher reserves, which blunted some of the impact of last year's crisis.

As some forbearance ends, however, nonperforming CRE loan totals are expected to rise, though probably not like during the financial crisis.

"It won’t be the tsunami we were all expecting last March and April,” Taconic Capital of New York principal and portfolio manager James Jordan told Green Street. “You will see a decent distressed opportunity, but it won’t be like the [Global Financial Crisis] because of all the capital flooding into the system.”

There might not be enough distressed debt to meet the demand for it in the coming months. Private equity funds in the U.S. have already raised hundreds of billions in anticipation of snapping up distressed debt, and thereby the underlying assets, at a serious discount.

“With all the capital out there, there’s going to be a bit of a ‘Three Stooges’ effect,” Real Capital Analytics Senior Vice President Jim Costello told Bloomberg in March. “They’re all running through the door at once, but nobody can get through.”