Dive Brief:

• Multifamily’s distress rate rose 50 basis points month over month to 10.8% in November, reflecting struggles with floating-rate debt and operating expense inflation, according to a report from CRED iQ.
• The rate of distress among commercial mortgage-backed securities apartment loans had fallen 270 bps from March to October, according to CRED iQ.  
• The CRED iQ overall distress rate reached 11.63% in November, with office properties exhibiting the most problems at 17.55%. The hotel sector posted distress rates at 10.33%, while retail sat at 9.08%.

Dive Insight:

CRED iQ’s report comes on the heels of Trepp’s November report, which found that delinquency rates for apartment CMBS loans fell 14 basis points to 6.98% in November, after topping 7% in October for the first time since December 2015.

Like CRED iQ, Trepp also pointed to issues in the office sector, which had an 11.68% delinquency rate during the month. And those issues could continue to grow.

“As remote work trends stabilize and lease rollovers occur in a high-interest-rate environment, office valuations face continued pressure,” CRED iQ said in the November report.

CRED iQ advises investors with heavy office and multifamily holdings to carefully monitor their holdings. 

“With nearly 60% of distressed loans tied to maturity defaults, the market’s ability to clear this backlog will depend heavily on interest rate movements and the willingness of special servicers to extend or modify terms in the coming quarters,” CRED iQ said in the report.

Richard Rubin, founder and president of adaptive reuse firm Babylon AR, said he thinks rising CMBS delinquencies in office and hospitality portfolios are creating an unprecedented pipeline of buildings ripe for conversion. For instance, Bloomberg reported that New York should see an influx of 12,000 new apartments from the conversion of outdated office buildings.

“For all intents and purposes, given the meltdown of most commercial office real estate and the demand for housing, specifically affordable housing at various levels, this is a logical solution,” Rubin told Multifamily Dive in emailed comments.

Rubin predicts that an adaptive reuse wave could prevent a full-scale collapse of the CRE sector while addressing America’s housing shortage. “Both the public and private sectors should be converting these assets on a wholesale basis,” he said.

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