In a recent video presentation, Marcus & Millichap’s John Chang said an experienced real estate investor sent him an article touting alarming news. Specifically, multifamily distress had nearly tripled in six months between January and June 2024. “The investor asked me if this is the wave of distressed deals that’s finally coming,” said Chang, who is the company’s Senior Vice President, National Director Research and Advisory Services.

Chang’s answer? Not so much.

For one thing, Chang said he doesn’t see a flood of distressed deals hitting the market. For another, he wasn’t confident that the doom-and-gloom headlines have that much validity. “Is there a kernel of trust in the headlines? Usually,” Chang said. “But is the situation as dire as they make it sound? Probably not.”

Clarifying the Data

The source of the angst is a recent report from CRED IQ, which explained that CMBS multifamily distress rates had increased 185% from January to June to 7.4%, while the overall rate had climbed to 8.62% for all commercial real estate assets.

However, Chang pointed out that the definition of distress in data includes performing and non-performing mature debt. “Basically, loans that have come due, but where the owner is still likely negotiating with the lender,” Chang explained. Also within that data grouping are current special service loans.

Furthermore, “just because the property is technically in distress doesn’t mean it will come out to market as a foreclosure or at a significantly discounted fire sale,” Chang said.

On the Other Hand . . .

Lenders are starting to clear their balance sheets and sell off loans that could pose a high risk. Chang said some of that includes poorly performing office buildings and weaker retail properties. “It appears that banks are offering much less forbearance, and they’re holding owners’ feet to the fire on properties in well-performing categories,” Chang said, adding that these properties include industrial, some retail types, medical office and apartments.

Not Time to Panic

Despite the maturities and a shift in lender strategy, Chang said the following points to a somewhat more positive outlook:

• Delinquency rates are low compared to historical standards. Delinquency rates for the office sector were 10.4% in 2012. Recent reports put office delinquency rates at 7.6% “on about a part with where it was in 2017,” Chang said. Additionally, delinquency rates stand at 2.4% for apartments, 0.6% for industrial and 6.4% for retail.

• Interest rates are decreasing. Chang said the 10-year Treasury rate is around 4.25%, down from 4.7% approximately three months ago and 5% from October 2023. Additionally, the Federal Reserve is signaling a likely rate cut this year, especially as inflation continues moving to the Fed’s 2% target rate.

Chang acknowledged the potential of headwinds, but “it does look like we’re through the worst of it, and the market is beginning to turn.” As such, he said that the headlines shouldn’t be taken at face value. “Dig under the surface with a shovel, not a rake,” he said, adding that a better activity is to examine what the market will look like at the end of hold periods. “At the end of the day, real estate is a long-term investment,” he said.