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CRE Distress Tracker Hits Decade-High of $107B

MSCI has released its U.S. distress tracker for the fourth quarter of 2024, which hit $107.0 billion. That represents a 24.3% or $20.9 billion year-over-year increase — and the largest rise seen in a decade, but still only a little more than half of the peak during the Global Financial Crisis. Additionally, this is the starting point for 2025.

The good news is that the rate of growth in distress has been slowing since the last quarter of 2023. Put differently, in calculus that would mean the second derivative, or how quickly change happens, is negative. Markets might want an immediate switch to falling distress, but turning down the rate of growth is a mathematically necessary step and important to recognize.

Another important comparison not made frequently enough is noting the difference between the total value of distressed assets and the count of them. Distressed large loans are a problem, but they don’t necessarily indicate a statistical pattern. As MSCI noted, at the end of 2024, the total number of distressed properties was about a quarter of the count at the height of the GFC.

Office distress, at almost $51.6 billion, was nearly half of the total outstanding distress. Retail was the second largest at $21.4 billion, multifamily third at $17.1 billion, then hotel at $12.7 billion, others at $2.6 billion, and industrial at $1.7 billion. However, although in third place, multifamily was the “primary driver” of Q4’s overall distress growth.

Many in CRE have wondered when distressed property sales would become a big way to gain value in markets. MSCI found that distressed property sales were 2.5% of the total annual deal volume of last year. That is both small and still significant as the largest portion since 2015. However, for further context, the percentage was close to 18% in 2010.

Potential distress — which is the collection of possible property-level problems like tenant distress or liquidation — is another factor to watch. The total for office is $74.7 billion but that’s far below the biggest risk type, which is multifamily at $108.7 billion. That’s 34.9% of total potential distress.

Something that could complicate the picture even further is the difference in nature between office and multifamily. Hybrid work has meant the exodus of many employees from office, cutting space usage, increasing vacancy rates, and leaving many property owners struggling to pay their bills. A key difference is that there aren’t a lot of empty apartment units for people to move into if landlords get into trouble.

Reprinted with permission from the Monday, 03 February 2025 07:21:37 EST online edition of GlobeSt © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.