CRE Loan Distress Up in 70% of Largest Metro Areas in June
Of the 50 largest metropolitan statistical areas (MSAs) tracked by CRED iQ, 35 markets, or 70 percent, exhibited month- over-month increases for June in the percentages of distressed commercial real estate loans.
Notable markets with the largest increases in distress included Minneapolis (plus 10.6 percent), Washington,D.C. (plus 2.5 percent), and Charlotte, N.C. (plus 2 percent). Of the markets with comparatively higher levels of CRE distress to the prior month, the average increase was approximately 61 basis points.
The sharp increase in CRE distress for the Minneapolis market further separates the MSA as an outlier for distressed commercial real estate properties. The Minneapolis MSA has the highest percentage of distressed CRE loans among the top 50 markets, equal to 33.6 percent. CRE distress in Minneapolis is nearly three times higher than Chicago (11.5 percent), which has the second-highest level of distress.
Of the 15 markets that exhibited month-over-month improvements in distressed rates, St. Louis (minus 2.7 percent) and Pittsburgh (minus 1.3 percent) had the sharpest declines. The distressed rate for the St. Louis MSA improved substantially after a $155 million mortgage secured by West County Center was modified with a two-year maturity extension. West County Center is a 743,945-square-foot regional mall in Des Peres, Mo., and its mortgage failed to pay off at maturity in December 2022. The loan was paid as part of the modification. The St. Louis MSA, and more specifically the St. Louis retail market sector, had the largest declines in distress among the markets and sectors monitored by CRED iQ.
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. The office and mixed-use sectors exhibited continued volatility, accounting for six of the 10 largest increases in distress by market sector. Washington, D.C., office (plus 10.6 percent), St. Louis office (plus 10.3 percent) and Chicago office (plus 5.6 percent) were among the market sectors with the sharpest month-over-month increases in CRE distress.
The Chicago office market sector alone had more than $450 million in newly distressed CMBS loans as of June 2023, including the special servicing transfer of a $310 million mortgage secured by River North Point, a 1.3 million-square-foot office property in Chicago’s central business district. Suburban Chicago office properties also transferred to special servicing due to credit issues: a $56 million loan secured by the 869,120-square-foot Riverway office complex and a $26 million mortgage secured by 9525 West Bryn Mawr Avenue, a 246,841-square-foot office building, both transferred to special servicing in May 2023. Both are in Rosemont, Ill.,roughly 20 miles northwest of Chicago.
The Chicago MSA is the fourth-largest office market, based on aggregate outstanding securitized debt, monitored by CRED iQ. The market sector with the highest month-over-month increase in distress was Charlotte retail, which saw its distressed rate surge to 24.5 percent of outstanding debt that is delinquent or specially serviced. A $151 million mortgage secured by 647,511 square feet of the Carolina Place Mall in Pineville, N.C., defaulted at its maturity in June and transferred to special servicing.
In summary, the Minneapolis MSA has the highest overall distressed rate — equal to 33.6 percent — and has maintained this position for over a year. Chicago (11.5 percent), Milwaukee (9.9 percent), Cleveland (9.8 percent), and Birmingham, Ala., (8.8 percent) comprise the remaining markets with the highest rates of distress. The Salt Lake City MSA (0 percent) has the lowest level of distress among the top 50 MSAs for the second consecutive month.
Marc McDevitt is a senior managing director at CRED iQ.