Distress in US Commercial Property Increased Further

The balance of distress in the U.S. commercial-property market rose to USD 71.8 billion at midyear, marking the fourth consecutive quarter of increase. Distress, which encompasses both financially troubled assets and assets taken back by lenders, outpaced workouts between property owners and lenders by about USD 8 billion during the quarter. Not since Q2 2020 at the onset of the pandemic has distress grown by as much in a single quarter.

Offices constituted more than 80% of the distress added during Q2 2023, with USD 6.7 billion of net inflows. By the end of June, the office sector was responsible for the largest share of marketwide distress, making it the first time since 2018 that neither the retail nor hotel sector was the biggest contributor.

Potentially distressed assets totaled USD 162.3 billion at the end of the second quarter. Not all potential distress leads to full-blown financial trouble: Of those assets classified as distressed at midyear, 35% had previously been deemed potentially distressed. In late June, federal regulatory agencies issued a policy statement on commercial-property loans and workouts, urging lenders to work with creditworthy borrowers who may be facing financial strain.