- Total distress, the combination of troubled and REO properties, rose 24% in Q4 compared to 2023.
- This marks a consecutive year of slowing growth.
- In total, roughly $107 billion of distress is in the market, well below the GFC peak of $195 billion.
- Not only is the pace of new distress easing, but the number of properties added is also decelerating. The net change of additions and workouts resulted in a gain of just one property in Q4.
- Loan maturities, lagging appraisals, and stubborn interest rates will continue to create distress opportunities in the market for the foreseeable future.
Distress remains a key focus for investors, but it has yet to materialize in the same way it did post-GFC. While the total amount of distress across troubled and REO properties rose 24% year-over-year in Q4, this marks four consecutive quarters of deceleration.
Does this indicate that distress has peaked? The data presents mixed signals. On the one hand, the pace of newly troubled assets slowed in the second half of 2024. Total REO barely budged quarter-over-quarter, and the number of properties entering distress and being worked out saw little movement in Q4.
However, sales figures tell a different story. While the percentage of distressed deals held constant year-over-year, the number of distressed sales jumped 32%, marking three consecutive quarters of gains. Unsurprisingly, office makes up the largest share of distressed sales as a percentage of volume, reaching 5.8% at year-end. This is a slight increase from 5.4% in 2023 but an improvement over Q3 when 10% of sales were distress-driven.
Aaron Jodka
Distress is not nearly as widespread as in the post-GFC cycle. However, opportunities remain and are worth exploring.
Distress will remain in the market for the foreseeable future. Lenders still have trillions of dollars in maturities over the coming years, and properties that have previously faced loan extensions may not be so fortunate next time. Balance sheets have been shored up, allowing lenders, particularly banks, to weather the storm of write-downs. Savvy investors have found ways to capitalize on distress, from acquiring short-sale properties and recapitalizing throughout the capital stack to buying B-pieces, among other strategies. These opportunities will remain valuable targets for some time to come.
