Blog post - 02.14.2024

Understanding Distressed Commercial Properties and How CRE Solutions Simplify Tracking Efforts 

In the world of commercial real estate, distressed properties can be both a challenge and an opportunity for real estate investors. While distressed assets have inherent uncertainties and risks due to financial and structural challenges, with the right approach, they can offer investors significant returns. Real estate professionals can identify potential investments and gain market insights by understanding and tracking distressed properties. 

What Is a Distressed Commercial Property?  

Distressed properties refer to commercial assets that face financial and/or legal challenges, which might lead to foreclosure. Distress can manifest due to mortgage delinquencies, economic downturns, neglect or other financial hardships experienced by property owners.  

Properties that are in financial distress and can’t keep up with outstanding debt might face the following scenarios: 

Short sales

In real estate, a short sale means a property is sold for less than the amount owed on the mortgage. To avoid foreclosure, the property owner tries to sell a distressed asset with the lender’s approval. 

Foreclosure

Foreclosure is a process where a lender takes back ownership of a property after the borrower stops making the agreed-upon loan payments.  

The foreclosure process varies by state and can be categorized into two primary types: 

  • Judicial Foreclosure: This process involves court intervention where the lender must file a lawsuit against the defaulting borrower. It’s a more time-consuming method, offering borrowers a chance to settle their debts before the property is auctioned. 
  • Non-Judicial Foreclosure: In states allowing this procedure, the foreclosure process can proceed without court involvement, provided the mortgage agreement includes a “power of sale” clause. This faster method means properties can quickly move to auction following a default notice. Non-judicial foreclosure is allowed in several states, including but not limited to Alaska, Arizona, Arkansas, California and Colorado. 

The exact steps of a foreclosure vary based on type, local laws and the conditions specified in the mortgage agreement, but they most commonly include the following:  

  1. Payment default: The payment default happens when borrowers miss at least one mortgage payment. The lender typically sends out a missed payment notice, but at this point, they are still willing to work with the borrower to catch up on payments. After three missed payments, the lender usually issues a notice to accelerate and gives the borrower 30 days to meet their mortgage obligations.  
  1. Notice of Default: After the fourth month of missed payment, lenders issue a formal and public notice specifying the borrower’s default. The notice of default outlines the amount owed, provides a grace period (30 days) for repayment, and warns of imminent foreclosure proceedings. 
  1. Auction: If property owners don’t rectify the default, the assets move to the auction stage. A foreclosure auction is a public sale where distressed properties are presented to potential buyers. The property is sold to the highest bidder, and the winning bidder becomes the new owner. 
  1. Real estate-owned property: If a property doesn’t sell at auction, it becomes a real estate-owned (REO) asset. At this point, the property is repossessed by the lender. Lenders are usually motivated to sell these properties to recoup some of their losses, presenting investors with a favorable opportunity to buy an asset.  

What Are the Benefits of Tracking Distressed Properties?  

  • Identifying Investment Opportunities 

Distressed properties might be an attractive opportunity for those looking to invest in commercial real estate or diversify their portfolio. Distressed properties are often priced below market value, making them an attractive investment option. 

Investors frequently rely on strategic renovation and repositioning to create value in distressed properties. By revitalizing a distressed asset, investors aim to gradually enhance its overall value and contribute to the property’s long-term appeal and marketability, with the prospect of substantial returns. 

  • Making Strategic Investment Decisions 

Tracking distressed properties doesn’t just provide investors with immediate investment prospects — it also helps them understand market dynamics and make forward-looking decisions.  

Professionals who track distressed properties can recognize emerging trends and understand the demand for specific types of commercial assets and what tenants prefer. This understanding allows investors to make decisions based on real-time market data and position themselves strategically in the commercial real estate market.  

How to Identify and Track Distressed Properties? 

Thanks to online databases and property research tools, real estate professionals can easily track distressed properties. Such tools allow professionals to access crucial data points such as property details, loan data and foreclosure status. Moreover, these platforms often feature advanced search functionalities, enabling users to narrow down their focus based on location, property type and other key criteria. 

CommercialEdge Research, part of the CommercialEdge revenue solution suite, is a comprehensive database powered by Yardi market intelligence that provides essential data points on distressed properties. Furthermore, the platform offers loan information, property details and historical sales data, among others. 

CommercialEdge Research allows professionals to filter properties based on foreclosure status: 

  • Notice of Acceleration 
  • Notice to Cure (or Default) 
  • Bankruptcy 
  • Foreclosed (REO) 

Moreover, the platform offers valuable insights into CMBS loans at various stages: 

  • On watch list: A CMBS watchlist keeps track of loans and properties that are not meeting their financial obligations or are behind on payments. 
  • Forbearance: Forbearance occurs when the lender agrees not to foreclose on the mortgage, and the delinquent borrower agrees to a payment plan to catch up on their payments gradually. 
  • In arrears: Being in arrears means that a payment is overdue after its due date for accounts like loans and mortgages. 

With these options, CommercialEdge Research equips professionals with a powerful tool for comprehensive analysis and decision-making in the realm of distressed property investments. 

Conclusions 

Keeping an eye on distressed properties in commercial real estate is a must for seasoned investors. By leveraging CRE solutions that provide up-to-date data on such assets, professionals can better position themselves to unlock unique investment opportunities and navigate the challenges of today’s dynamic market. 

Article tags:

Evelyn is a creative writer covering commercial real estate trends and insights in the U.S. Evelyn was previously a senior associate editor at Multi-Housing News and Commercial Property Executive. She has an academic background in Journalism and Irish Studies. Evelyn has been covering the CRE industry since 2017. Reach her via email.

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