Number of Distressed Properties, Delinquent Loans Up Approx. 50% This Year
The number of financially wounded property assets continue to pile up as the recession (waning though it appears to be) continues exact a punishing toll on commercial real estate, with many properties now seriously overvalued and overleveraged. In this statistical state-by-state analysis, CoStar Group identified more than 80,000 distressed office, industrial and shopping center properties (defined as those that are currently 60% or more vacant.) In addition, we tallied more than $79 billion in seriously delinquent CRE loans and another $6.3 billion in foreclosed bank-held CRE properties.
To assess the toll this year has taken on commercial real estate it is useful to compare the current levels of distress with a similar analysis CoStar completed at the beginning of the year. In January, CoStar tallied specially serviced CMBS loans totaling $8.2 billion. In this latest go around, that amount has now ballooned up to $46.9 billion. CMBS loans in special servicing consists of loans that are either delinquent in loan repayments or had reached maturity without pay off or were current but had issues concerning ongoing credit problems with either tenants or borrowers.
At the first of March, CoStar tallied the number of distressed office buildings in the country (with a vacancy of 60% or greater) and found more than 19,600, using its CoStar Analytic service. This go around, we identified more 31,000 -- a more than 50% increase.
Property values have plummeted throughout the recession and have continued to fall this year. The prices of properties sold are down in a range from 15% to 35% since just before the onset of the recession. The average price of office buildings sold in 2007 was nearly $219/square foot; this year it has averaged about $142/square foot, CoStar Analytics data shows. Sold retail properties have fallen in sale price from about $178/square foot in 2007 to about $132/square foot now. Sold industrial/flex properties have fallen in sale price from about $61.50/square foot in 2007 to about $52/square foot now.
As companies have gone out of business or been forced to cut costs significantly, the demand for space has evaporated. In the first half of 2007, office building net absorption nationally was 41.8 million square feet; in the first half of this year, tenants have given back 40.9 million square feet of space to landlords. The numbers are even worse for industrial/flex space. In the first half of 2007, tenants took on an additional 94.1 million square feet of space nationally; in the first half of this year, they have given back 97.5 million square feet.
The complete reversal in absorption has contributed to the rapid pile-up in the number of buildings that are now more than 60% vacant. That has prompted net operating incomes to plummet and led to a huge increase in the amount of delinquent loan repayments.
"> Click here to download the table of number of distressed office, industrial and shopping center properties by state.
In compiling delinquency and foreclosure dollar figures, CoStar relied on reports from bond rating agencies, CMBS monthly bondholder reports and bank balance sheet data reported to the Federal Deposit Insurance Corp.
Specially-serviced CMBS loan delinquencies are far outpacing the dollar volume of commercial income producing property loans on bank books. There was more than $46.8 billion in CMBS loans in the 50 states in special servicing at the end of July. That compares to slightly more than $32.2 billion in nonaccrual loans identified by banks in the 50 states. Bank loans listed in nonaccrual status are more than 90 days delinquent but have not yet been charged off by the banks.
Multifamily loans listed by banks as nonaccrual increased in the second quarter to $6 billion, up from about a $3.5 billion at the start of the year. In addition, the amount of foreclosed multifamily properties now held by U.S. financial institutions increased to $1.58 billion, up from about $1.2 billion at the start of the year.
Problem income-producing commercial property loans continued to climb as well. Loans in nonaccrual status held by banks increased to $26.2 billion in the 50 states, up from about $17 billion at the start of the year. The current figure bank delinquency figure represents about 2.88% of all loans for income-producing commercial property outstanding ($1.09 trillion). The CMBS delinquency rate is closer to 3.2% of outstanding CMBS-held loans.
"> Click here to download the table of the value of specially serviced CMBS loans, bank-held nonaccrual loans and bank-held REO property by state.