Understanding the importance of distressed properties is essential to navigating the unpredictable real estate market. Distressed properties are assets that are in a financially distressed state, meaning the current owners are financially unable to maintain the property. According to data from the MSCI Capital Trends US Distress Tracker, distressed balances in the U.S. commercial real estate market will surge to $85.8 billion by the end of 2023, marking a significant one-year increase of $28.9 billion. This upward trend, although slower in pace, is a notable trend in the current market.
Trepp® CMBS research insights highlight the multifaceted nature of the downturn across segments. Office properties dominated the downturn, accounting for 41% of distressed properties. While office properties saw notable gains, the multifamily sector experienced significant declines.
The importance of understanding distressed assets goes beyond just a statistic. Distressed assets are an indicator of market health and reflect broader economic trends as well as industry-specific challenges. As the data shows, the impact of distressed assets ripples throughout the financial ecosystem, affecting investors, lenders and communities.
In January 2024, the overall U.S. CMBS delinquency rate increased 15 basis points to 4.66%. Meanwhile, the office sector saw a large increase, increasing 48 basis points to 6.30%. Meanwhile, multifamily delinquency rates decreased due to large apartment loan dispositions in 2019. The overall CMBS delinquency rate increased 172 basis points year over year. CMBS 2.0+ delinquency rates also increased, increasing 178 basis points year over year to 4.50%.
The rise in distressed properties highlights the need for vigilance in real estate transactions. In this context, the importance of title insurance, which provides protection against unforeseen legal issues associated with distressed properties, becomes apparent.
Want to learn more? Join us on Wednesday, April 17 for the first session of our 2024 CLE Title Camp webinar series, “Insuring Distressed Assets,” with insurance underwriters Christian Lane and Glen Trowbridge.