Signs of CRE Distress, but Not Full Blown Crisis

Good morning,

Signs of CRE distress, but not full blown crisis, Chicago leads markets in apartment rent growth, and housing market stuck between high rates and low supply. Let’s delve into today’s topics.

📈 Market Update

⌛️ Signs of CRE Distress, but Not Full Blown Crisis

While there are indications of growing distress in CRE markets, such as increases in distressed loan statuses and bank charge-offs, the feared wave of widespread distress and fire sales has not yet materialized. The relative stabilize is due to factors like most owners not facing immediate refinancing pressure, banks working with borrowers, and institutional investors waiting for clearer price discovery. Much distress activity is already occurring but looks different than during the Great Recession, with distressed sellers accepting discounts but not massively undervaluing properties. The market seems to be in a holding pattern, with significant hidden distress that could double if rates keep rising, but still far from crisis levels.

Lending down 52% YoY:
Debt originations are down 52% annually, and the current market has 32% fewer lenders. Originations by debt funds are down 73%, CMBS is down 79%, while bank originations are down 48% YoY.

🔝 Chicago Leads Major Markets in Apartment Rent Growth

Chicago has seen the highest apartment rent growth among major US markets for three straight quarters, with rents rising 3.6% annually - more than triple the national average. While other cities like Phoenix and Atlanta experienced huge spikes followed by declines in 2022, Chicago's rent growth has been slower but steadier. With limited new inventory putting pressure on landlords, Chicago's market is balanced and dominated by mid-tier properties that can keep raising rents. The city's rent growth is expected to continue outpacing other major markets through at least mid-2024.

🏠️ Housing Market Stuck Between High Rates and Low Supply

Mortgage rates surging past 7% are causing further turmoil in the housing market.. Many eager homebuyers are getting priced out as rates rapidly increase, while others are rushing to lock in loans before rates potentially go even higher. At the same time, tight inventory is preventing the typical housing downturn price declines, with home values continuing to climb even as sales cool off. This mismatch between high rates and low supply has created a prolonged freeze in the market.

✍️ Further Reading

• Will the Post-Labor Day Return to Office Finally Pan Out? (RD)

• Capstone Forecloses on Nightingale’s Whale Building (RD)

• Denver’s Booming Biotech Market Helps Land New Medical Tech Campus a $188 Million Deal (CS)

• Colleges Race To Build Athletic Training Facilities and Expand Stadiums (CS)

• Blackstone, Office Giant Vornado to Join Forces on Manhattan’s First Film-and-TV Studio (WSJ)

• Miami Races to Finish $350 Million Soccer Stadium Before Messi’s Time Is Up (WSJ)

• Microsoft Breaks Ground on $1B Data Center (CPE)

• Market Pulse: Markets Oscillate as Investors Look for Direction Beyond Jackson Hole (Trepp)

📊 Chart of The Day