This article is part three of a six-part series focusing on the six most critical questions about development and commercial property in Southwest Florida.
Across the country, borrowers and lenders are bracing for a potential surge of distressed assets. According to a study by Cushman & Wakefield, the U.S. commercial property market exhibited an alarming $80 billion in outstanding distress as of Q3 2023. Even more concerning, the report showed more than $215 billion in potential distress on the horizon, surpassing the cumulative distress observed during the Great Recession.
However, Southwest Florida has been able to buck a number of national trends in commercial real estate over the last few years. This brings us to the third question in our series:
Will Southwest Florida See an Avalanche of Distressed Assets in 2024?
To understand the reasons why borrowers and lenders are concerned about distressed assets, it’s important to first understand how commercial loan interest rates contribute to distress levels.
Interest Rates and Distressed Assets
Commercial real estate loans are typically structured with short maturities, often in the neighborhood of eight to ten years, with a much longer amortization period. Consequently, property owners face a large balloon payment at the end of each loan. If owners are unable to settle these balloon payments in full, they will refinance that balloon payment at current interest rates.
When the majority of existing commercial loans were established, historically low interest rates were in effect. Eight years ago, the average 10-year treasury yield was an astonishing 1.84 percent. Now, with rates more than double that, the cost of refinancing a commercial property balloon payment may not be worth the added cost of borrowing money. This is particularly true in markets where inventory is high and property values are declining.
Distressed Property in Southwest Florida
Here in Southwest Florida, we are experiencing some of the lowest levels of distressed commercial real estate in the state. Our area boasts a loan loss rate of only 11%, which falls below the state average of 12%. Southwest Florida’s resilience comes in part from our strong rental rates, which are helping to keep many properties profitable and net operating income (NOI) positive.
Will distress levels rise in Southwest Florida? Most likely, although not to the potentially catastrophic levels we may see in other parts of the country. Maturing loans will exert pressure across all product types, especially middle and low-quality office assets. However, rent growth has lifted NOI considerably over the life of the average loan, meaning we shouldn’t anticipate an avalanche of distress. Southwest Florida borrowers who secured financing prior to 2019 have likely accumulated enough appreciation to make their property’s current values higher than their debt balance. Coupled with low vacancy rates, strong job growth, and favorable net migration, our region will likely outperform most of the rest of the country.
Are you a commercial property owner with a loan on the cusp of maturity? If so, the Commercial Property Experts at Cushman & Wakefield | Commercial Property Southwest Florida (CPSWFL) can help you determine your best next move in our current economic climate. CPSWFL has the data, analytics, and local experience to help you understand the dynamics of our region’s economic potential and commercial property landscape. Complete our online contact form or call us at 239-489-3600 to speak with an expert.