During a recent video presentation, John Chang, Senior Vice President and National Director of Research and Advisory Services at Marcus & Millichap, shared that he had been sent an article by an experienced real estate investor claiming that multifamily distress rates had nearly tripled in the first six months of 2024. The investor asked if this was a sign of a wave of distressed deals to come.
However, Chang’s response is not as alarming. He does not foresee a flood of distressed deals hitting the market and questions the validity behind these doom-and-gloom headlines. While there may be some truth to them, it is likely exaggerated.
Chang clarifies that the source for this concern is from CRED IQ’s report stating CMBS multifamily distress rates increased by 185% between January and June with an overall rate climbing to 8.62% for all commercial real estate assets. However, he explains that this data includes both performing and non-performing mature debt which could simply mean negotiations between owners and lenders or current special service loans.
Furthermore, just because properties are technically considered “distressed” does not necessarily mean they will end up on the market as foreclosures or at heavily discounted prices.
On another note,
lenders are starting to sell off high-risk loans from their balance sheets such as poorly performing office buildings or weaker retail properties due to stricter forbearance policies being implemented recently.Chang also points out some positive factors indicating towards better outlooks:
– Delinquency rates remain low compared historical standards (e.g., office delinquency rate was higher in 2012 than it currently stands)
– Interest rates have decreased significantly over time (e.g., Federal Reserve signaling possible rate cut)
While there may still be potential challenges ahead,
Chang believes we have passed through the worst period thus far with signs pointing towards improvement in markets rather than further decline.He advises against taking headlines at face value and suggests digging deeper to get a better understanding of the market’s current state. Real estate is a long-term investment, and it is important to consider what the market will look like at the end of hold periods rather than getting caught up in short-term fluctuations.
