CMBS Distress Accelerated in Second Half of 2023
CRED iQ examined loans that were added to the servicer watchlist during the second half of 2023. Building upon our mid-year report, our objective was to explore the underlying factors and the associated trend of distressed commercial real estate loans.
As of the December 2023 remittance reports, 15,373 loans were added to the servicer watchlist in the second half of 2023. During the final six months of 2023, almost $100 billion of loans were added to the watchlist for signs of upcoming distress. In that same six-month period 860 loans were transferred to the special servicer.
When factoring in the first-half (H1) results, a total of 23,085 loans were added to the servicer watch list in 2023, with the second half (H2) accelerating the pace by roughly 110 percent compared to the first half of the year. October had the highest amount of loans added to the watchlist with a total of 4,843 loans with a combined unpaid loan balance of $20.7 billion. In total, over $133 billion of loans were added to the watchlist in 2023. For comparison, there were approximately $25 billion of loans that were transferred to the special servicer in 2023.
Diving into the underlying credit factors for loans added to the watchlist during the second half of 2023:
• 35.8 percent of all watchlist loans were attributable pending maturity or anticipated repayment date.
• Debt service coverage ratio (DSCR) triggers for floating-rate loans represented 15.3 percent of the names on the list. Low DSCRs for fixed-rate loans compared to underwriting amounted to 8.6 percent of watchlisted loans in the second half of 2023. Low DSCR triggers for fixed-rate loans amounted to 4.9 percent. Adding the three DSCR buckets together totals 28.8 percent of all recently added watchlist loans.
• Delinquent taxes accounted for 5.5 percent of loans added to the watchlist in the second half of 2023.
• Major tenant expirations were attributable to 5.1 percent of watchlist loans during July and December 2023.
An example underscoring what occurred in the second half of 2023 is the $525 million loan (inclusive of $143 million subordinated debt) that was added to the servicer’s watchlist in September due to concerns with the second-largest tenant, WeWork. The loan is backed by the Midtown Center, an 867,654-square-foot office tower located in Downtown Washington, D.C. Fannie Mae serves as the largest tenant of the property, accounting for 82 percent of the gross leasable area (GLA). The subject currently serves as Fannie Mae’s global headquarters. However, the tenant’s space is listed as available for lease starting June 2029, coinciding with Fannie Mae’s lease expiration date. Furthermore, WeWork (13 percent GLA) declared bankruptcy in November, causing additional occupancy concerns, despite the tenant’s November 2036 lease expiration.
The property most recently reported a 100 percent occupancy and 2.97 DSCR net cash flow in June 2023. The most recent performance compares to the August 2019 underwritten occupancy of 100 percent, DSCR of 3.98 (senior debt) and 2.9 (total debt), and an implied cap rate of 4.95 percent. The most recent property value was the appraised value of $960 million in August 2019.
Mike Haas is the founder and CEO of CRED iQ.