The distressed debt associated with commercial real estate reached its highest point in the last ten years during the previous quarter. The total distressed debt surged to $80 billion, even though there are properties worth $216 billion that might be considered distressed. MSCI has highlighted that there’s approximately $900 billion of debt in this sector that is expected to mature by the end of 2024.
The commercial real estate sector is experiencing increasing pressures, with the distressed debt of commercial properties reaching a decade-long record in the recent quarter. Data from MSCI Real Assets, as mentioned by Bloomberg, indicates that the value of commercial real estate properties that were either in bankruptcy, had been repossessed, or were under liquidation surged to $80 billion during the third quarter. This represents an increase of $5.6 billion from the second quarter and is the highest distressed debt amount observed in the sector over the past ten years.
Distressed debt linked to office buildings constituted the most significant portion, amounting to $32 billion, which is 41% of the total distressed debt. This was followed by retail properties with a total of $21 billion and hotel properties with distressed debt amounting to $14 billion.
While these numbers are significantly lower than the aftermath of the 2008 Financial Crisis, where the total distressed commercial property debt exceeded $150 billion, there’s a more considerable amount of present debt that’s potentially distressed. MSCI pointed out that properties worth around $216 billion could be at risk due to delayed debt balance payments and sluggish leasing.
For several months, experts have been expressing concerns about the commercial real estate sector. Factors such as rising interest rates, stricter lending conditions, and declining property values are putting pressure on the sector. The increasing borrowing costs are especially concerning for property owners. This is because there’s approximately $900 billion in commercial real estate debt set to mature and will require refinancing in 2023 and 2024, as highlighted by MSCI in a report from March.