US Commercial-Property Distress Swelled in 2023

The pool of distressed U.S. commercial properties grew to USD 85.8 billion by the end of 2023, led by distressed office assets, as weaker prices and higher lending rates challenged the market. The balance of distress, which encompasses financially troubled assets and assets taken back by lenders, increased throughout the year. Still, the pace of additional trouble slowed in the fourth quarter, when new distress outpaced workouts by USD 4.2 billion, down from USD 9.0 billion in the third quarter.

Pain in the property types

At the end of 2023, offices constituted 41% of the value of cumulative distress. However, in terms of the new trouble added in the fourth quarter alone, the office market’s share fell to 39% from more than 80% in the second and third quarters of the year. Distress in the retail market, on the other hand, swelled. Resolutions to a distressed situation had exceeded new distress for retail earlier in the year, but in the fourth quarter this trend was reversed.

Potential distress, which may precede full-blown financial trouble, totaled USD 234.6 billion at year-end. The multifamily market constituted the largest pool of potentially distressed assets, with a value of USD 67.3 billion, ahead of office with USD 54.7 billion.