Commercial Real Estate in Distress: Investors Ready to Pounce with $250 Billion
Real estate investors are preparing to scoop up distressed commercial properties as high interest rates and remote work continue to batter the market.
Commercial Real EstateDistressed PropertiesPrivate Equity FirmsInterest RatesRemote WorkReal Estate NewsJul 10, 2024
The signs of distress are already evident. Commercial real estate values have been declining, with prices dropping 7.5% over the fourth quarter, the steepest drop recorded in 13 years. Banks are quietly shedding exposure to commercial real estate debt, selling off loans on various office buildings to minimize their losses.
The work-from-home trend, which began during the pandemic, has become a lasting legacy of the COVID-19 era. Office vacancies have climbed to a record-high 20.1% over the second quarter, with effective office rents remaining flat for four consecutive quarters. This has put immense pressure on property owners, who are struggling to maintain profitability.
A specter of debt looms large over the industry, with $1.1 trillion in debt set to mature this year. Refinancing these loans at higher interest rates and lower property valuations will be a herculean task. The percentage of commercial real estate debt in late payment status has already climbed to 1.18%, the highest level in nearly a decade.
Some real estate veterans are calling for a major correction in the industry, warning of a wave of bankruptcies and forced sales. As loan extensions end, the evidence of distress is expected to ramp up, with 2024 potentially being the year the dam bursts.
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Apollo is a global alternative investment manager.
Capital Economics is a macroeconomic research consultancy.
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Frequently Asked Questions
What is the estimated value of commercial real estate debt set to mature this year?
$1.1 trillion
What percentage of commercial real estate debt is in late payment status?
1.18%
What is the current office vacancy rate in the US?
20.1%
How much has commercial real estate values declined in the fourth quarter?
7.5%
What is the estimated amount of cash set aside by private equity firms for North American commercial properties?
$256 billion
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