Distressed commercial real estate in retreat?

December 25, 2011

Distressed commercial real estate in the United States — including properties in default, foreclosure or taken back by lenders — totaled $171.6 billion in October 2011. That is a dip from the recent past.

The level of distress began to plateau when it reached $191.5 billion in March 2010, and it has stayed in the $175 billion to $190 billion range until now, according to data from Real Capital Analytics.

We think those levels should continue to come down in a meaningful way in 2012 and beyond, assuming interest rates cooperate and economic expansion accelerates. The real test of the distress plateau is likely to be seen in 2012 and 2013, when about $300 billion in loans comes due each year.

Nationally, the office sector represents the largest share of distressed commercial real estate at $41.9 billion. That is $5.6 billion less, or 11.8 percent, since the peak in October 2010. Apartments have the second-highest level of distress, with $35.6 billion in troubled loans — a $1.8 billion (4.8 percent) drop since October 2010.

Land and other property types have the third-highest level of distress with $29.8 billion in distressed assets, a decline of $3.4 billion, followed by retail with distressed assets at $28.6 billion, an increase of $2.1 billion or (7.9 percent).

Hotels dropped from second place in October 2010 to fifth currently, falling $14.1 billion (36.8 percent) to $24.2 billion. Industrial property has by far the lowest volume of distressed assets but its total has been rising since October 2010. At that time there was $8.6 billion in distressed industrial assets; currently there is $11.6 billion of distress, an increase of 34.9 percent.

Stressed real estate: where Washington ranks

While the volume of distressed commercial real estate properties is significant, also consider the looming volume of stressed property. These properties have characteristics of concern in the short term — maturing loans, bankrupt tenants, underperformance, financially troubled owners, or other significant obstacles that could potentially lead to distress in the future.

Manhattan has the highest total volume of distress with $11.8 billion, followed by L.A.-Orange County with $10.0 billion. South Florida has $971 in distressed property value per capita, the largest amount per capita after Manhattan, which has $2,388 per capita. Houston has the lowest amount among the markets we track at $111 per capita.

Among the 10 markets we track, the Washington area has the fourth-lowest level overall of distressed assets (excluding stressed) at $1.4 billion, while Baltimore has the lowest, at $330 million. But stressed assets are much higher in Washington at $3.1 billion, fourth-highest among the 10 surveyed cities. Distressed real estate per capita is $253 per person in the Washington area, fourth-lowest among the 10 markets, while Baltimore has $121 per capita which is the second-lowest of the 10 cities surveyed.

Mike Donnelly is a senior associate at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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