As we hear about home foreclosures and defaults on loans across the country, the commercial real estate market and its related REIT exchange traded funds (ETFs) brace for a possible multi-billion dollar collapse of troubled property loans.
Real Capital Analytics, a New York research company, estimates that $107 billion worth of income-producing property, such as hotels, offices, apartment complexes and warehouses, is in serious financial distress and another $84 billion worth of developments have been stalled or abandoned, reports Terry Pristin for The New York Times.
It is evident that more than 1,000 properties are troubled, with 200 properties already transferred to lenders. It is calculated that $26 billion worth of buildings are “troubled” based on foreclosure proceedings, notices of default, appointments of receivers or filings for bankruptcy protection. Another 3,700 properties, valued at $80.9 billion, are on the brink due to owners suffering financially or owners who will be unable to refinance when loans mature next year.
New York tops the list of areas under distress with 268 properties valued at $12 billion. Other areas include Los Angeles ($11 billion), Las Vegas ($6.6 billion), and southern Florida ($4.2 billion).
When owners are forced to sell, the expected values will decline by 25% to 30%. It is noted that owners with experience, solid relationships and financial resources are likely to survive. Basically, if you’re not Donald Trump, then you may be out of luck.
Commercial REIT ETFs that may experience the effects of a collapse alongside troubled income-producing property loans include:
- First Trust S&P REIT (FRI): down 40.8% year-to-date
- SPDR DJ Wilshire REIT (RWR): down 39.8% year-to-date
- Vanguard REIT Index ETF (VNQ): down 37.8% year-to-date