24 Hour Local Real Estate News

Underwater Loans, Distressed Assets Still Shaping CRE Landscape

A new MSCI report on CRE trends to watch in 2025 finds that despite interest resuming, “the recovery is still nascent and not everywhere all at once.”

One factor is the still high percentage of the $500 billion in CRE loans due to mature this year that can be classified as in trouble. “If these loans were to mature at Q3 2024 price levels, approximately 14% would be flagged as underwater, meaning their current asset values have fallen below the outstanding loan balance,” the report stated.

In some cases, the assets have serious underlying issues, noted Alexis Maltin, executive director of MSCI’s America’s real estate assets research, in an interview with GlobeSt.com. One of these is the year they were built. “In the industrial sector, many assets built before 2010 have obsolescence and other fundamental problems,” she said.

In contrast, many of the underwater apartments, have loans that originated between 2020 and 2022 when the properties were marketed for record high prices and at very low mortgage rates that made them attractive to investors. Since then, prices have dropped sharply, and sellers would not get the same price for them today. In 2025, nearly $19 billion of multifamily housing is worth less than its loan value, amounting to 10% of maturing loans, according to the report.

“It is not that there was anything fundamentally wrong with these assets, but that the underwriting was off base,” Maltin commented.

Office is expected to have the greatest difficulty in securing refinancing this year. Nearly 30% of maturing office loans – $30 billion worth -- are valued at less than the debt secured against them, MSCI reported. However, Maltin sees it as a cyclical occurrence that occurs when different asset classes fall out of favor – even though she believes office may not have experienced this kind of stress before.

She said data shows that in 4Q 2024 CBD offices were selling much better than in the year prior, as prices fell enough to attract investors. “They see value in making these purchases,” she commented. “Some of the top sales were offices with tenants like Google and others that have signed long-term leases, making office an attractive investment.”

Retail also has some fundamental issues, especially for the largest malls, many of which are not performing. These shopping centers account for 80% of underwater retail loans, Maltin said.

On the other hand, she said 4Q 2024 saw a decline in the level of distress in the market. While ongoing, it has slowed in the last four quarters. Unlike underwater loans, which she defined as those where more is owed on the asset than its real value, she described distressed loans as those which the lender intends to foreclose on that are either delinquent, or under special servicing, and will either be sold or taken back by the lender.

Reprinted with permission from the Monday, 27 January 2025 07:05:34 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.