CRE Loan Distress Declines in Most Large Metro Areas
By Marc McDevitt June 12, 2023 12:10 pm
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Distress rates improved in May in most of the 50 largest metropolitan statistical areas (MSAs) that CRED iQ tracks.
Commercial real estate distress declined in 37 marks, or 74 percent of the 50 largest MSAs. The average decline was approximately 64 basis points. The recoveries were a welcome signal of alleviation, but declines in May were not enough to outweigh the extensive increases in distress rates experienced in April in most markets.
Notable markets with the sharpest declines in distress in May included Charlotte (minus 2.7 percent), Minneapolis (minus 2.3 percent), and Birmingham, Ala. (minus 2.0 percent).
Despite improvement in May, Minneapolis retains its position among the worst-performing of the top 50 markets with an overall distressed rate of 22.9 percent. The Kansas City (plus 3.6 percent), New Orleans (plus 1.7 percent) and Bridgeport, Conn. (plus 1.1 percent) markets were among those that exhibited the highest month-over-month increases in distressed rates during May.
The Kansas City MSA was particularly impacted by the office sector after one of the largest properties in the market, the Aspiria Office Campus, transferred to special servicing. The campus encompasses 3.7 million square feet of office space in Overland Park, Kan., and secures a $232.5 million mortgage. The special servicing transfer is related to the loan’s impending August 2023 maturity date.
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. After reviewing month-over-month changes in distress, CRED iQ observed that office or mixed-use sectors accounted for nine of the 10 largest increases in distress by market sector.
In addition to the Kansas City office market, the Hartford and Cincinnati office sectors exhibited relatively large monthly increases in distress.
In the Hartford MSA, a $51.4 million mortgage secured by Constitution Plaza transferred to special servicing after a maturity default.
In the Cincinnati MSA, two loans totaling $58.6 million, secured by office properties totaling 610,000 square feet (312 Elm Street and 312 Plum Street), transferred to special servicing following occupancy declines.
Additionally, a $1.3 billion mortgage secured by a portfolio of office and mixed-use properties owned by Workspace Property Trust transferred to special servicing in April and adversely impacted distress rates for several market sectors. The 146-property portfolio securing the loan is geographically dispersed across five markets: Miami, Minneapolis, Philadelphia, Phoenix and Tampa. High collateral concentrations in the Philadelphia and Tampa office and mixed-use sectors caused some of the highest individual increases in May distress among the 50 largest MSAs.
Switching focus to positive developments, the Indianapolis hotel sector exhibited the greatest month-over-month improvement in CRE distress. The decline in the lodging distressed rate for the Indianapolis MSA was driven primarily by the cure of a $49.2 million loan secured by the Conrad Indianapolis, a 247-room full-service hotel along Monument Circle in Indianapolis’ central business district. The loan transferred to special servicing in April 2020, but returned to the master servicer as a corrected loan three years later after multiple forbearances.
As previously highlighted, the Minneapolis MSA has the highest overall distressed rate — equal to 22.9 percent — and has maintained this position for the trailing 12 months. Cleveland (10.3 percent), Milwaukee (10.1 percent), Chicago (10 percent), and Birmingham, Ala. (8.7 percent) comprise the remaining markets with the highest rates of distress.
The Salt Lake City MSA (0.1 percent) has the lowest percentage of distress among the top 50 MSAs. In April, the San Jose market held the position with the lowest percentage of distressed CRE loans; but multiple office loans in the Bay Area market became distressed in May.
Marc McDevitt is a senior managing director at data analytics firm CRED iQ.
