Brief Note: Dissonance in Commercial Real Estate

Photo by Sean Pollock on Unsplash

At the moment there are some truths that seem inconsistent on their face.

My morning reading prompted this note. The specific stimulant was today’s CRE daily. The lead story was “CRE Credit Distress Accelerates as Office Woes Deepen.

They reported that CRE distress and delinquincies are rising and are at the highest levels since 2014. Two of their notes:

With a wall of debt maturities ahead, investors warn of a wave of office defaults.

Germany’s Deutsche Pfandbriefbank plans to exit U.S. CRE, aiming to offload a $4.7B portfolio.

We also learn that one is seeing increased distress in collateralized loan obligation (CLO) markets. Specifically, in May:

64.4% of loans had already matured, up from 63.1% last month.

50.0% of those loans are not performing—double the rate from January.

Only 14.3% of all loans are current, a drop from 16.8% in April.

Pre-maturity delinquencies climbed to 21.3%, the third monthly increase in a row.

These issues reflect the consequences of loans made in 2021 and 2022, when low rates and high valuations led to aggressive underwriting.

I recall well seeing, in 2021 and 2022, several articles promoting CLOs as extremely safe investments. Events since make me glad to have avoided investing in financial engineering.

Here is the summary in CRE Daily:

The CRE debt problem is no longer isolated to offices or regional banks—it’s spreading across property types and investor classes. As the wall of maturities approaches and lenders face a lose-lose choice between write-downs and deferrals, the system is showing cracks that could widen fast if macro conditions slip.

This all sounds grim, doesn’t it?

But then down in the more detailed news we find:

CRE market fundamentals remain stable, with leasing and investment activity expected to rise despite headwinds from tariffs and cost pressures.

and

Multifamily investment jumped 35% in Q125 as buyers bet on long-term rent growth despite slowing rents and peak new supply.

There is also some positive news about the office sector, as has been true a lot lately.

Here is how I make sense of all this. Overall the CRE market is healthy today.

But there is a significant amount of debt issued in 2021 and 2022 on assumptions that were invalidated by subsequent events. How much?

1. Well commercial real estate distress is at $116B

2. About 2/3 of the loans owned by CLOs have matured and that is a good guess for all of the debt.

3. So total eventual distress looks like $180B. This will need to be liquidated.

4. But it is only 4% of the total commercial real estate debt of $4.8T.

5. Plus, there is ample dry powder around ready to buy viable, overleveraged properties for dimes on the dollar.

That, my friends, is a headwind but not a disaster overall. Pity the LPs and small owners who hold the bag on a lot of it. But don’t write off the sector.

Please click that ♡ button. And please subscribe, restack, and share. Thanks!