Have You Considered Offloading Your Distressed Properties Now?

Commercial real estate foreclosures have skyrocketed 117% from March 2023 to 2024 (ATTOM), with office buildings leading the way. According to MSCI, foreclosed and seized commercial property hit $20.5 billion In June 2024, up 13% from Q1 and the highest quarterly level since 2015.

Delinquent loans are piling up, the market is deteriorating fast, and banks are sitting on distressed properties.

Many lenders are holding out, hoping for a market rebound that might never come. But waiting it out is not a strategy—it creates capital, liquidity, credit, operational, and market risks that could cost lenders dearly.

Other lenders are proactively moving distressed properties off their balance sheets, mitigating risks and increasing flexibility. ?

In this case, the lenders that act early are most likely to walk away with the best outcomes.

Why?

• Properties Depreciate While Standing Still: In a declining market, properties don’t just sit—they lose value. The longer a lender hangs onto a distressed property, the more it depreciates – and the lower the recovery. The Federal Reserve is projecting a 40% drop in CRE prices, which could translate into a $77 billion hit to banks. Selling early means cutting losses before they get worse.
• First One In Gets The Best Price: Early movers are positioned to sell before the market gets saturated, avoiding the price drop that happens when competition heats up. Wait too long, and as piles of properties flood the market, the lender becomes just one more seller in a very crowded room, with no choice but to accept lower offers.
• There’s An Opportunity Cost: Capital tied up in distressed properties could be used more productively. Offloading non-performing properties frees up resources and funds for new investments, lending opportunities, or strengthening the lender’s overall financial position.
• You’re Going to Need a Buyer: As distressed properties hit the market, buyers swoop in, take the best deals, and move on. With each wave of distressed properties, the pool of qualified buyers gets smaller—that’s just reality. The longer a lender waits, the tougher it gets to find a buyer, especially one willing to pay a decent price. Acting early gives lenders a better chance to close a deal while there’s still demand.
• You’re Going to Need a Caretaker. Sometimes, things just fall by the wayside. Hold on to an underperforming or underutilized commercial property too long and it could become a disruptive source of community blight. Lenders must make arrangements and pay to care for the property while still in their purview.
• You’re Going to Need an Attorney. The longer a lender holds onto a distressed property, especially after foreclosure, the more likely they are to face legal liabilities related to property maintenance, safety issues, or environmental concerns.
• It’s Not Good for the Neighborhood. When lenders hold onto a distressed property for too long, it can negatively affect the local economy. Vacant or underutilized commercial properties can lead to decreased foot traffic, reduced local tax revenue, and potential blight in the surrounding areas.
• There's a Freshness Factor: Early buyers of distressed properties may have a better chance to reposition or repurpose distressed assets to meet changing market demands, potentially increasing their value – and the price those buyers are willing to pay.
• Remember the Regulators: Regulatory scrutiny is intensifying as the CRE market weakens. Banks that delay offloading distressed properties could find themselves subject to higher capital reserve requirements and forced write-downs, penalties, or worse. A regulator may even step in if they see a lender holding on to too many risky properties. Acting early helps avoid these hassles while helping balance sheets stay in balance.

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What are lenders doing to offload distressed property?

Here’s some of what we’ve been hearing:

• Off-Market Sales: Selling quietly, without drawing public attention, helps lenders avoid triggering a broader market decline – and a landslide of unwelcome questions. Off-market sales allow lenders to match distressed properties with buyers who know how to manage risk and close transactions quickly. Look to private equity firms or REITS, or better yet, look to private commercial real estate investment firms who act efficiently, respectfully, and confidentially – they’ll likely become ideal long-term partners. Early buyers of distressed properties may also have a better chance to reposition or repurpose them, potentially increasing their value – something private commercial real estate investors excel at.
• Bulk Sales and Securitization: When distressed properties start stacking up, bundling them together and selling in bulk or tranches can clear them out quickly. While it might mean accepting lower prices, the speed and efficiency of bulk sales often outweigh the potential for deeper losses if the lender waits.
• Foreclosure Auctions and REO Sales: If borrowers default, selling properties at auction is a fast way to recoup losses. If the property doesn't sell, it becomes a real estate-owned (REO) property – it goes back to the lender. Lenders that hold onto REO properties too long risk even steeper losses down the line, so it's better to sell sooner rather than later.
• Farm It Out: Some lenders turn to third-party asset managers who specialize in distressed properties. These professionals have the expertise and resources needed to maximize recovery, quickly remove troubled properties from the lender’s balance sheet, and enable the lender to refocus on more productive business activities.
• Work It Out: Working with borrowers to extend or modify loan terms can stabilize a property, making it more attractive to other potential buyers, prevent foreclosure, and keep the property's value from plummeting.
• Provide a Financing Cushion: Offering seller financing can attract buyers who might not qualify for traditional loans, helping the lender move distressed properties off the books faster.

?Taking a loss is never fun.

But for lenders with distressed properties, taking it early can prevent a much bigger one later --- and provide balance sheet relief.

Tod Buckvar brings over 40 years of expertise in commercial real estate as an investor, developer, manager, and valuation and tax expert. As Founder and CEO of JSR Capital Group, a privately-owned commercial real estate investment firm, Tod specializes in acquiring and revitalizing office and industrial properties. Under his leadership, JSR Capital transforms underutilized assets into high-performing investments, benefiting both investors and communities. With his unparalleled network and ability to turn challenges into opportunities, Tod consistently delivers strong investor returns. Well known as a trusted business and family man, his meticulous, strategic approach makes him the ideal partner for financial institutions seeking secure, successful outcomes.