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Bloomberg: Global CRE Faces $175B of Distressed Debt

The slump in the world’s biggest asset class has spread from the housing market to commercial real estate, Bloomberg News reported. This in turn threatens to unleash waves of credit turmoil across the economy. 

Globally, nearly $175 billion of real estate credit is already distressed, according to data compiled by Bloomberg. That’s about four times more than the next biggest industry, software and services.  

“As the toll from higher interest rates and the end of easy money mounts, many real estate markets are almost frozen with some lenders telling borrowers to sell assets or risk foreclosure amid demands for additional capital from landlords,” reported Bloomberg. 

In particular, distress levels in European real estate are at the highest in a decade, in part because of a decline in liquidity, according to a study by law firm Weil, Gotshal & Manges. UK commercial property values fell more than 20% in the second half of 2022, MSCI Inc. data show. In the U.S., the drop was about 9%, according to Green Street. 

The fall in transactions and development in commercial and residential real estate will inevitably impact spending in the real economy. In turn, that could pose a risk to jobs and growth. 

“What we have in this downturn is a fairly unique set of economic circumstances,” Ian Guthrie, a UK-based senior managing director at JLL’s loan advisory team, told Bloomberg. “Interest rates are tightening instead of softening the blow for real estate and other corporates.”

As a result, he said, “You have a pipeline of potentially defaulting loans” where “values are under pressure and cash flows are under pressure.” 

This year, he added, “is when those problems will start to manifest themselves.” About one in 10 corporate loans in Europe is already underperforming and showing increased credit risk, according to JLL. 

The signs of a downturn are mounting in the U.S., with job cuts rippling beyond the tech sector. But despite a dip, commercial property values “are still moderately overpriced,” Michael Knott, head of US REIT Research at Green Street, told Bloomberg.  

Knott expects another 5% to 10% decline this year. “Appraisers are behind the curve; transaction activity has slowed down considerably,” he said. 

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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