Majority of Largest MSAs See Dip in Monthly CRE Distress
Market performance for nearly 400 metropolitan statistical areas (MSAs) across the U.S., covering over $900 billion in outstanding commercial real estate (CRE) debt. Distressed rates include loans that are specially serviced, delinquent, or a combination of both.
Distressed rates and month-over-month changes for data reported as of January are broken out by property type for a granular view of distress by the market-sector. Of the 50 largest MSAs tracked by CRED iQ, 27 of those markets exhibited month-over- month declines in the percentage of distressed CRE loans.
The average decline among the 27 markets with lower distressed rates was minus 0.2 percent. Notable markets with decreased levels of distress in January included Portland, Ore. (minus 2.2 percent), Washington, D.C. (minus 0.8 percent), and Birmingham, Ala. (minus 0.7 percent).
There were 23 markets with month-over-month increases in the percentage of distressed CRE loans. The average increase for these markets was plus 0.4 percent.
The Charlotte MSA had the highest increase in overall distress this month (plus 3.7 percent), which was driven by adverse developments in the office sector. The Denver MSA additionally had a notable increase in distress (plus 1.9 percent) driven primarily by the office sector.
For a more granular analysis of the top 50 markets, CRED iQ further delineated individual markets’ distressed rates by property type for a comprehensive view by market sector. For a second consecutive month, deterioration in the office sector was a primary factor in increased distress.
Metrics continue to worsen for the Denver office market. Last month’s Market Delinquency Tracker detailed the special servicing transfer of the $243.6 million Republic Plaza office loan. More recently, a $277.1 senior mortgage secured by Wells Fargo Center transferred to special servicing. These two credit developments pushed CRED iQ’s Denver office distressed rate to 14.2 percent, which compares to 7.3 percent just two months ago as of November 2022.
Aside from Denver, the Charlotte office market exhibited a swiftly elevated increase in distress after a $160 million mortgage secured by 301 South College Street transferred to special servicing and a $120 million loan secured by Charlotte Plaza defaulted at maturity.
Another market-sector that was impacted by increased distress was the Tampa retail market. A $72.4 million loan secured by The Shops at Wiregrass, a 729,324-square-foot lifestyle center became 30 days delinquent as of January. The property was 80 percent occupied as of September and has been adversely impacted by in-line tenant turnover since 2020.
Several hotel and retail markets continued to improve in January 2023. Three of the five largest percentage declines in distressed rates across market sectors in January were lodging markets. Four of the 10 largest percentage declines were in retail markets.
The Portland lodging market exhibited one of the sharpest declines in distress following a modification of a $51.9 million mortgage secured by the 205-key Westin Portland. The loan had been with the special servicer since June 2020 due to pandemic-related distress but returned to the master servicer in December 2022.
The Minneapolis MSA has the highest overall distressed rate at 20.4 percent, which was slightly higher than the previous month. Cleveland (10.7 percent), Birmingham (10.4 percent), Hartford, Conn. (8.9 percent), and Milwaukee (8.7 percent) comprise the remaining markets with the highest rates of distress. For the second consecutive month, Sacramento, Calif.’s MSA (0.1 percent) is the market with the lowest percentage of distress among the top 50 MSAs.
Marc McDevitt is a senior managing director at analytics platform CRED iQ.