Why Are We Not Seeing More Distressed CRE?
This is the first article I've seen asking the question, where is the distress we expected? Rates are up 50%, Loan-To-Value is down at least 25%, and values for most asset classes are down from their 2022 highs. So, where is the distressed debt?
A banker friend said the Fed has put little pressure on bankers to deal with problematic loans. The message to the banks is “work through them.” The Fed is not forcing banks to take losses and clean out their bad loans like they did in 2008-2010. That creates a much different environment for CRE. Banks are not inclined to recognize the loan loss on their balance sheet. Maybe they have written them down, which looks much better to shareholders and regulators than to show a loss.
We should shift the vernacular to "stressed " from “distressed.” I can't imagine many refinances made three to five years ago are not stressed today. Borrowers are not getting the anticipated proceeds, and many have to contribute more equity, crushing their cash flows. But the deals are getting done and borrowers are surviving for a couple more years until they believe rates will go down.
The stress builds up for both borrowers and bankers, which causes real distress. There is only so much capital that passive investors want to keep contributing to deals when they are years away from exiting and their cash flow is cut in half. That might be a year from now.
