US Commercial Real Estate Faces Mounting Distress

As reported in GlobeSt, rising distressed asset volumes in commercial real estate are sparking concerns about market stability. 

Multifamily Mayhem

According to brokers from Kidder Matthews, value-add multifamily investments, once a top choice for investors, are now grappling with economic headwinds. High-basis operators are struggling to maintain cash flow as evictions and vacancies rise. 

Nathan Thinnes, SVP at Kidder Mathews, reports that the growing number of property liens in the multifamily sector is a key distress signal, as unpaid vendors often indicate financial trouble.

Over the past decade, syndicators drove up prices to unsustainable levels, worsening challenges as interest rates climbed. Thinnes points out that tighter margins, combined with the broader affordability crisis, are pushing many properties toward bad debt.

Office Ordeals

Office properties currently represent almost half of all distressed assets, with retail and apartments following at 20% and 14%, respectively. 

However, distress growth slowed in Q3, with total distressed CRE values now at roughly half the peak levels of 2010, according to Gary Baragona, VP of Research at Kidder Mathews.

Despite this slowdown, multi-tenant office and back-office properties have seen valuations plunge by as much as 75%, according to Randy Clemson, EVP of valuation advisory services. Special servicers are delaying formal appraisals, opting instead for broker price opinions to avoid triggering immediate loan write-downs.

Uncertain Pricing

The Federal Reserve’s recent decision to lower interest rates introduced new variables for CRE pricing. Many lenders extend loan terms to avoid foreclosures, especially for office and multifamily assets. 

However, higher bank lending rates and a spike in the 10-year Treasury yield prevent cap rates from declining, complicating borrower relief.

Peter Beauchamp, SVP at Kidder Mathews, highlights the $400B in near-term CRE loan maturities as a potential market disruptor. Regulatory shifts under the incoming Trump administration could also delay distressed assets from entering the market even more, creating further uncertainty around pricing.

Looking Ahead

Distress volumes remain below historic highs, but mounting pressures in the multifamily and office sectors suggest further challenges ahead. With plenty of capital on the sidelines waiting for the right opportunities, the market could see significant pricing resets as these assets cycle through the system.s to market faster and at more accessible prices, addressing South Florida’s growing demand for modern, storm-resistant housing.