CoStar data revealed a significant increase of 29% in the number of office properties linked to problematic commercial mortgage-backed securities (CMBS) loans from early May to early June. The total count of these properties rose from 412 to 530, spanning an area of 92.8 million square feet with a vacancy rate of 29.2%.
The largest property added to this list was Wilshire Courtyard in Los Angeles, underpinned by a $408 million loan. The Onni Group-owned one million-square-foot office property was moved to special servicing due to imminent monetary default, as per CoStar data. Special servicers are third-party companies assigned to bring the borrower back to their loan's current status or formulate an alternative plan.
Not only office properties saw a rise in distressed loans. Industrial real estate experienced a surge of troubled loans from 58 to 147 properties, marking a 153% increase. This rise mainly came from flex properties, serving also as offices, with an overall industrial property vacancy rate of 8.5% and a specific flex property vacancy rate of 9.6%.
Retail properties accounted for the highest number of CMBS loans in special servicing at 682, a 1.5% increase from 672 a month earlier. These properties covered an area of 77.4 million square feet with a 13.1% vacancy rate.
Multifamily properties also saw an increase of 8.7%, moving from 355 to 386 properties. These properties included 27,680 units and recorded a vacancy rate of 17.3%.
Conversely, the hotel sector noted a decline, with CMBS loans in special servicing decreasing by 5.5% from 385 to 364. These properties accounted for 60,102 rooms and reported a 12-month average occupancy rate of 65.6%.
Investment Opportunities Loom: Gray Capital, a multifamily firm from Indianapolis, anticipates promising investment prospects due to a surge of commercial real estate loans nearing maturity. Owners who opted for short-term and floating interest rate financing at the end of 2021 and early 2022 may encounter difficulty refinancing at the current higher rates, according to a report by Gray Capital.
Spencer Gray, Gray Capital CEO, expressed uncertainty about the upcoming 6-12 months but anticipated some real distress which may pave the way for acquiring incredible assets at a substantial discount. He also predicted that this distress will be short-lived, considering the ever-strong base case for multifamily properties and the expectation of gradually decreasing interest rates.
In the previous year, Gray Capital initiated The Gray Fund, raising $100 million to invest in properties that could benefit from property and management improvements.
J.P. Morgan Private Bank, a financial advisor for wealthy families, echoed similar investment sentiments. It identified two opportunity areas: extending credit to high-quality borrowers and acquiring distressed assets at below their intrinsic value. However, they also warned clients about potential further degradation in the office sector, considering the persistence of remote work and already declining valuations due to higher interest rates.
Commercial Real Estate Recovery Varies: Since the peak of the coronavirus pandemic, commercial real estate has seen an inconsistent recovery. DBRS Morningstar's tracking of 600 metropolitan areas revealed unexpected winners and losers.
Over 40% of the total outstanding CMBS loan balance is centered in five markets — New York, Los Angeles, Las Vegas, Washington, D.C., and San Francisco, none of which had special servicing rates exceeding the April national average of 6%, as per DBRS Morningstar.
Yet, three of the next largest CMBS markets — Chicago, Houston, and Philadelphia — all had special servicing rates of over 11%.
Minneapolis, with a 53% rate due to a $1.39 billion Mall of America loan, and Central New Jersey, at 24%, primarily due to troubled malls, had the highest special servicing rates among the 50 largest markets.
West Palm Beach, Florida, and Sacramento, California, showed the lowest special servicing rates at 0% and 0.28%, respectively. These markets benefitted from pandemic-related migration from the Northeast and tech and industrial firms' relocation from San Francisco and Silicon Valley.
This kind of market behavior could trickle down into tertiary markets like San Luis Obispo. So far, San Luis Obispo has shown signs of stability and sustainable growth in the last 6 months. The market is predicted to continue in this trend, presenting an amazing opportunity for homeowners.
