Top U.S. Markets See Uptick in Distressed CRE Loans

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“Two out of every three markets in the 50 largest metropolitan statistical areas tracked by CRED iQ exhibited month-over-month increases for August in the percentage of distressed commercial real estate loans within the CMBS universe,” wrote Marc McDevitt, a senior managing director at CRED iQ.

“August marked the second consecutive month that markets with month-over-month distress outnumbered markets with improvements in distress. Regional malls drove much of the change in distress on a market-by-market basis. 

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“Sharp increases in distress were observed for the Birmingham, Ala., MSA (plus 5.42 percent) and the Portland, Ore., MSA (plus 3.06 percent). The Louisville, Ky., (minus 1.38 percent) and Baltimore (minus 1.15 percent) markets exhibited the greatest month-over-month improvements.

“Retail sectors were the primary drivers behind the increases in distress within the Birmingham and Portland markets. Specifically, a $216 million loan secured by the Clackamas Town Center, a 1.4 million-square-foot regional mall located 10 miles outside of Portland, transferred to special servicing due to imminent maturity default ahead of the loan’s October 2022 maturity date. The maturity default pushed the distressed rate for the Portland retail sector significantly higher to 42.5 percent. 

“Similarly, Riverchase Galleria, an 890,182-square-foot regional mall located 13 miles south of Birmingham, is part of a three-mall portfolio that secures a $286.7 million mortgage. This loan transferred to special servicing in July 2022 ahead of its September 2022 maturity date due to imminent default. As a result, the distressed rate for the Birmingham retail sector rose to 22.66 percent.

“Despite pockets of increased distress for most market sectors, there were areas of improvement. The Louisville  retail sector exhibited a 10.1 percent decline in the rate of distressed loans, which was the sharpest month-over-month decline among all property types in the top 50 MSAs. 

“Louisville’s relief in distress was attributed in part to the $152.5 million Mall St. Matthews loan, which is secured by a 670,000-square-foot portion of a regional mall. The loan returned to the master servicer following a modification that extended the loan’s maturity date to June 2025.

The Minneapolis MSA has the highest overall distressed rate at 21.77 percent, which was an increase compared to the prior month’s distressed rate of 20.10 percent. Birmingham (9.69 percent), Cleveland (9.56 percent), Hartford, Conn., (9.4 percent) and Milwaukee (9.11 percent) comprise the remaining markets with the highest rates of distress. 

“Birmingham was a new addition to the top five distressed markets this month stemming from increased retail distress. The Jacksonville market (0.26 percent) had the lowest percentage of distress among the top 50 MSAs, supplanting the Sacramento, Calif., MSA (0.3 percent) which now has the second-lowest distressed rate.”