Distress in U.S. commercial real estate rose to $71.8B as of midyear, according to the latest MSCI U.S. Distress Tracker, with office assets representing more than 80% of all distress, up $6.7B during the second quarter.

By the end of Q2, the office sector was responsible for the largest share of marketwide distress at $24.8B, marking the first time since 2018 that neither retail nor hotels held that dubious distinction. Retail had about $22.6B in outstanding distress and hotels accounted for $13.5B at the end of the second quarter.

The total amount of distress increased by just over $8B from the first quarter. Not since the pandemic panic of Q2 2020 has distress grown by as much in a single quarter, the company reported. The second quarter also marked the fourth consecutive quarter in which distress increased.

Potential distress is up as well, hitting $162B, MSCI reported, with office again leading the way with a $43.3B share, topping multifamily at $38.1B, retail at $28.2B and hotels at $25.2B.

Potential distress has had a habit of turning into actual distress, the company said. Of the assets in distress as of the end of Q2, some 35% made the jump from having been classified as potentially distressed.

In late June, the federal government urged lenders to work with CRE borrowers to keep the problem from getting any worse, but it isn't clear whether that will happen.

Commercial real estate deal volume nationwide dropped 63% year-over-year in the second quarter, totaling $83.6B, MSCI reported, though the company added that the declines aren't as dire as the crash amid the Global Financial Crisis.

Compared with the average deal volume for second quarters from 2015 to 2019, Q2 2023 was down 35%, according to the company. The steeper year-over-year drop is partly attributable to the fact that debt was still relatively cheap and investors were still chasing yields a year ago.

CRE prices are falling as well. The RCA CPPI National All-Property Index dropped 10.2% compared with a year ago, though the pace of the declines is moderating. The steepest price declines were in the fourth quarter of 2022 and the first quarter of 2023, according to MSCI.