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Office buildings continue to be rocked by a debt and valuation crisis — but there's plenty of room for it to get even worse, according to new data from analytics firm MSCI.
Nearly $80B of commercial real estate loans were in distress in the third quarter, the highest volume of distress in the industry since 2013, when Global Financial Crisis loan workouts were still in the system, MSCI reports. The total amount of distressed debt increased for the fifth consecutive quarter.
Over $215B worth of commercial property debt is at risk of distress, whether due to upcoming maturities, slow lease-up or missed debt service payments, MSCI found in its quarterly report. Newly distressed loans totaled $9.9B in Q3, 93% of which came from office buildings, while only $4.3B worth of distressed loans were worked out in the quarter. MSCI counts loans for which it has direct knowledge of property-level problems like foreclosure, court proceedings, major tenant loss or special servicing transfers as distressed.
More than $32B of office-backed debt is in distress now, but $50B is at risk of distress, reflecting the number of loans scheduled to mature next year without a clear path to refinancing.
While only $7.5B worth of multifamily loans is in distress, nearly $66B is marked as at risk, though MSCI noted in its report that the huge number is more indicative of the sheer size of the asset class rather than a sign of sector-level crisis.
Since the short- and long-term future of interest rates is unknown, the slow pace of debt workouts may not be surprising. Even though dry powder for opportunistic acquisitions is building up once again, the pace of distressed asset sales is still at a crawl. Overall, transaction volume was down 53% from Q3 last year, while year-to-date transactions are down 55%.
The worsening state of CRE lending is also having an effect on bank balance sheets, as major banks said in their Q3 earnings reports they increased their credit loss allowances by hundreds of millions of dollars due to distressed property debt, again driven by office buildings.
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