What The Data Says About Distressed Real Estate Markets
CRED iQ, one of the largest commercial real estate data companies released a report that found in February of 2023 34 of the 50 largest MSAs they track saw “comparatively higher levels of distress in commercial real estate loans” with approximately 21 basis points more of distressed rates than the previous month.
Quick Notes:
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The markets and assets most impacted:
Office and hotels had the heaviest weight in added distress to a market and some of the most impacted markets were Minneapolis, Birmingham, Milwaukee, Cleveland, and Charlotte.
The impact on your portfolio:
Whether you invest in these markets or not real estate is hyper local, so even if you have assets here it may not mean they are performing worse or actually in distress but these are the types of macro metrics we look for when analyzing and picking markets to invest in or expand into.
It’s also important to understand the asset you’re investing in and the volatility it may have. As mentioned before office and hotels weighed the heaviest in swinging these metrics for these MSAs but if you’re invested in something else like affordable housing or industrial properties these asset classes might actually start to perform better in these markets.
Loans and Distress:
Loans are typically what create distress situations in real estate investing. Short term loans coming due now when interest rates may have tripled since the investment was purchased not too long ago will add to distress in a market with rates being too high to refinance into and cap rates rising too much too quickly for sellers to hold a lot of leverage.