{"id":1004716845,"date":"2024-06-11T05:23:23","date_gmt":"2024-06-11T13:23:23","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004716845"},"modified":"2024-06-19T09:54:31","modified_gmt":"2024-06-19T17:54:31","slug":"capital-ideas-dissecting-distress","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/capital-ideas-dissecting-distress\/","title":{"rendered":"Capital Ideas: Dissecting Distress"},"content":{"rendered":"
\n
\"Therese
Therese Fitzgerald<\/figcaption><\/figure><\/div>\n\n\n

At the CREFC annual conference last week, much of the commentary by lenders, servicers and investors centered on distressed loans. The situation is most severe in the office market, where values have been disrupted by rising interest rates, increased operating costs, and concerns around utilization.<\/p>\n\n\n\n

So when I sat down with Lonnie Hendry, chief product officer for Trepp Inc., I asked him to break down the distress<\/a>. Is the situation as bad as it sounds?<\/p>\n\n\n\n

Trepp\u2019s May 2024 Delinquency Report was actually \u201cfavorable,\u201d Hendry said, with CMBS delinquencies inching down to 4.97 percent. Even office, which had peaked at 7.38 percent in April, was at 6.94 percent in May thanks to the resolution of some sizeable loans.<\/p>\n\n\n\n

But Hendry does not expect the positive trend for office to continue, and it may peak at 10 percent sometime this year.<\/p>\n\n\n\n

\u201cBroad brush, the market is performing better than the headlines would suggest, but there is a lot of distress that just hasn\u2019t made it through the system yet,\u201d he noted.<\/p>\n\n\n\n

The CMBS market has about $30 billion of office loans maturing throughout the remainder of 2024, Hendry said, and a lot of those loans have very low debt yields in place, very low DSCRs and low occupancies relative to stabilized norms.<\/p>\n\n\n\n

\u201cNone of those things bode well for refinancing, bode well for sale,\u201d Hendry said. \u201cSo, what you are seeing is just this slow drawdown of people having to make decisions around the office sector.\u201d<\/p>\n\n\n\n

\n\n\n\n

READ ALSO:<\/strong> Capital Market Trends That Will Shape 2024<\/a><\/p>\n\n\n\n

\n\n\n\n

There is talk from institutional-grade owners about handing the keys back to lenders, and some have followed through. Meanwhile, a number of properties have sold significantly below their previous sale prices<\/a>. Still, Hendry would not label the office situation \u201ccatastrophic\u201d for CRE. \u201cDuring COVID, just as an example, I think lodging hit 25 percent delinquency,\u201d Hendry noted. \u201cNow, here, quickly, we are nowhere near that with office.\u201d<\/p>\n\n\n\n

On the other hand, office’s financing issues, he said, will not be resolved by a reduction in interest rates, which may or may not happen this year. It may help psychologically and get some buyers and sellers off the fence, but the sector would still be refinancing at higher rates, and it would still be addled by changing fundamentals\u2014namely the shift to remote and hybrid work, which is beyond the control of borrowers and lenders.<\/p>\n\n\n\n

Changing fundamentals can be blamed for a number of seemingly solid single-asset, single-borrower CMBS office deals going south this year. That unexpected turn of events came up frequently during the CREFC panel discussions.<\/p>\n\n\n\n\n\n

\u201cWithout some sort of large-scale, massive change in the way people\u2019s behaviors have been adapted after COVID,\u201d Hendry said, \u201cthere\u2019s nothing an owner of a building can do to bring people back to the office.\u201d<\/p>\n\n\n\n

What would really help the entire sector, he said, is if the federal government decided to make employees return to the office. \u201cThat by itself is enough to start making office more viable,\u201d he said.<\/p>\n\n\n

\n
\"Lonnie
Lonnie Hendry, Chief Product Office, Trepp Inc.<\/figcaption><\/figure><\/div>\n\n\n

Elsewhere in real estate<\/h2>\n\n\n\n

Troubled loans are not exclusive to office. Multifamily has been very stable, Hendry observed, but there are some signs of “cracks.\u201d Rent growth abated and has not yet recovered. Meanwhile, expenses have grown significantly. The delinquency rate in May was 1.7 percent, up from 1.33 percent in April.<\/p>\n\n\n\n

\u201cCombine that with a higher cost of capital and refinancing and higher interest rates loans,\u201d he said, and there\u2019s definitely some challenges for the multifamily sector.<\/p>\n\n\n\n

There were also a lot of multifamily deliveries in 2023 and 2024, but the \u201csilver lining\u201d is that there will be significantly fewer properties coming online between 2025 and 2028.<\/p>\n\n\n\n

Overall, Hendry said, he would be bullish on multifamily, particularly for borrowers that don’t have short-term floating-rate debt expiring this year or next.<\/p>\n\n\n\n

With a delinquency rate of 0.5 percent in May, industrial currently seems like the preferred asset class, Hendry said. But the rental rates, which have \u201ctripled and quadrupled\u201d in some markets, may not be sustainable. Some markets, he said, have pulled back on rents and demand is softening.<\/p>\n\n\n\n

\u201cSo you\u2019re not seeing developers come in and build a million square foot spec spaces anymore,\u201d he said. \u201cBut there is still an insatiable demand for the that 250,000 square foot and less that can be divided.\u201d<\/p>\n\n\n\n

Retail, \u201csurprisingly,\u201d would be the second-healthiest in terms of delinquencies, Hendry reported. Retailers and retail property owners that have survived COVID<\/a> have proven their business models, and he has seen some retail strip centers\u2014like those that have TJ Maxx and Ross Dress for Less as anchors\u2014sell for really aggressive pricing and low cap rates.<\/p>\n\n\n\n

The delinquency rate for retail, though, was 5.94 percent in May and April. But that was still better than hotel, which had a 6.22 percent delinquency rate in May, up from 5.97 percent in April.<\/p>\n\n\n\n

\u201cRetail has been a really great story in the midst of some bad stories,\u201d Hendry observed.<\/p>\n\n\n\n

It sounds like those stories, at least in the office sector, are going to get worse before they get better.<\/p>\n","protected":false},"excerpt":{"rendered":"

Will lower interest rates help troubled CRE borrowers in the office market? Not likely, says Trepp’s Lonnie Hendry.<\/p>\n","protected":false},"author":756,"featured_media":1004706954,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21825,21684],"tags":[35305],"class_list":["post-1004716845","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","category-viewpoint","tag-trepp-inc"],"acf":[],"yoast_head":"\nCapital Ideas: Dissecting Distress - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/capital-ideas-dissecting-distress\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Capital Ideas: Dissecting Distress\" \/>\n<meta property=\"og:description\" content=\"Will lower interest rates help troubled CRE borrowers in the office market? 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