CRE Distress Climbs to $94.2B in Q2 Driven by Office and Apartment

Total cumulative U.S. commercial property distress hit $94.2 billion in Q2 2024, increasing by $2 billion from the previous quarter, according to MSCI’s Capital Trends US Distress Tracker.

Jordan B. & Han-Gwon Lung
July 29, 2024

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Good morning. According to MSCI’s Capital Trends US Distress Tracker, total cumulative U.S. commercial property distress hit $94.2 billion in Q2 2024, increasing by $2 billion from the previous quarter.

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🎧️ Episode 3 of No Cap is now live! Jack and Alex delve into the latest commercial real estate headlines, including Biden’s Rent Control Proposal, multifamily delinquencies, the economy, and more.

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property distress

CRE Distress Climbs to $94.2B in Q2 Driven by Office and Apartment

According to MSCI’s Capital Trends US Distress Tracker, U.S. commercial property distress reached $94.2 billion in Q2 2024, up $2 billion from Q1.

Growing distress: The quarter saw $10.6B in new distress, with $8.6B resolved. Office properties lead in distress, accounting for $41B, followed by retail at $21.8B. The apartment sector faced $14B in distress, while the hotel and industrial sectors experienced $13.3B and $1.7B, respectively.

Zoom in: The potential distress balance reached $201B, with apartment assets topping the list at $56.9B, followed closely by the office sector at $50.9B. Notably, San Francisco’s 3,165-unit Parkmerced added nearly $2B in new apartment distress after its April transfer to a special servicer.

Top markets: San Francisco’s distress was led by apartments, unlike most markets dominated by office issues. In NYC boroughs, apartments made up 60% of total distress. Manhattan is the top distress market nationally due to office sector woes, while Chicago has the second highest office distress at $4B.

Handing back the keys: The value of real-estate-owned (REO) properties, which are assets reclaimed by lenders through foreclosure, increased. In Q2 2024, the cumulative total of REO properties rose by 13% from the previous quarter and surged 46% compared to the same period last year.

➥ THE TAKEAWAY

Big picture: While the office sector remains a major source of commercial real estate distress, but the apartment market is catching up, driven by remote work trends, urban exodus, housing oversupply, rent control, high costs, and income inequality, especially in San Francisco and NYC.

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✍️ Editor’s Picks

Skyrocketing prices: Starter homes now cost $1 million in 237 U.S. cities, highlighting a dramatic rise in entry-level home prices over the past five years.
Mega-expansion: Pompano Beach’s massive 225-acre development, The Pomp, aims to add 4,000 homes and extensive retail, office, and entertainment spaces.
Mr. acquisition: Mr. Cooper is acquiring Flagstar’s mortgage operation for $1.4 billion, adding 1.3 million customers and $356 billion in assets to its portfolio.

🏘️ MULTIFAMILY

West Coast exit: Wood Partners, the nation’s fourth-largest apartment developer, is closing its West Coast operations, citing difficulties in building housing in the region.
High-Rise: Core Spaces is advancing a 26-story student housing tower near UC Berkeley, pending approval. The tower will feature 456 units, retail space, and a sustainable design.
Land Use: Dallas’ ForwardDallas 2.0 land use plan advances to the city council, sparking debate over its potential impact on single-family neighborhood zoning amid an affordable housing shortage.
Tampa bet: Fannie Mae grants a $77 million loan to Daniel Corp for The Mav in Tampa’s Channel District, providing extra time for lease-up and stabilization amid rising interest rates.

🏭 Industrial

Slowdown: U.S. industrial construction saw a significant decline in 1H24, with only 97.8 million square feet (MSF) of new space starting construction compared to 147 MSF last year.
On the rise: Despite higher interest rates curbing new construction, Chicago’s industrial real estate market has decreased vacancy rates and significant build-to-suit activity.

🏬 RETAIL

Wealthy appeal: McDonald’s new CosMc’s concept is attracting wealthier customers with its upscale, drive-thru-only offerings.
Tech-driven: The American Dream megamall is using AI and data analytics to optimize customer experience and store operations.
Blocked: A judge last week has paused the $25B Kroger-Albertsons merger after Colorado Attorney General Phil Weiser argued it would harm competition, consumers, and workers.

🏢 OFFICE

Turnaround: Feil Organization surrenders 730 North Franklin Street to Beltway Capital via deed-in-lieu of foreclosure, with R2 investing to revitalize the struggling office space into smaller, rentable suites.
New campus: Westwood US, affiliated with UK’s Wellington College, buys a former Airbnb office in San Francisco for $24M to establish Hiba Academy, a Chinese-American prep school.
Discount deal: L.A.-based BH Properties is set to purchase the half-empty 117,000-square-foot office building at 989 Market St. in San Francisco for $13.5M, an 80% discount from its $61.3M valuation a decade ago.

🏨 HOSPITALITY

Regulation: A new bill in NYC aims to regulate nonunion hotels by banning them from outsourcing key functions, igniting strong reactions from both hotel owners and the Hotel and Gaming Trades Council.
Loan monitoring: A $22.4M loan on the Fort Lauderdale Marriott North has entered special servicing due to a December maturity and increased expenses impacting cash flow.