By John Covaleski, Commercial Real Estate Direct Staff Writer

Slightly more than $50 billion worth of commercial properties have become distressed since the start of the year, according to Real Capital Analytics.

The dollar volume of properties classified as distressed by the New York research company increased by 136 percent to $88.2 billion, while the number of distressed properties rose 131 percent to 4,566. Some 1,649 assets valued at a combined $23.5 billion were added to the distressed rolls just since mid-February.

The increases were driven primarily by the bankruptcy of General Growth Properties Inc. and troubles in casino-hotel properties in Las Vegas and Atlantic City, N.J.

Real Capital's definition of distressed encompasses properties that are in default of their mortgages, including ones taken over by lenders, owned by a troubled or bankrupt entity or have a major tenant in bankruptcy. It also includes properties whose debt has been restructured and those taken over by the holders of junior debt.

Bankruptcy is a common theme among the assets that have fallen into the troubled category this year. In addition to the bankruptcy filings by owners, filings by tenants, both major and non-major, have resulted in lost rental income and hurt some properties' ability to service debt.

And, the bankrupt Lehman Brothers Holdings is or was an investor in 34 assets with a combined value of $2.7 billion that became listed as troubled this year. Some of that trouble surfaced amid allegations that Lehman failed to provide committed financing.

"There's definitely a lot more trouble in the market and a lot more bankruptcies now," said Jessica Ruderman, senior research analyst at Real Capital. She noted that the increase in tabulated volume may be partly due to the fact that Real Capital just started tracking troubled assets late last year and has since refined its research methodology, which would make recent reports more comprehensive.

Regardless of methodology, there was a big uptick in troubled assets, driven by a factor that investors had long anticipated - the maturity of loans. Meanwhile, a dormant debt-credit market makes it difficult for borrowers to sell properties or get new financing to pay off maturing debt.

At the same time, the stalled economy has reduced tenant demand, which has crippled properties' ability to generate the cash needed to meet their debt-service obligations and kept some developers from reaching the leasing levels required to complete projects.

The volume of real-estate owned, or REO, assets taken over by lenders now stands at 522 properties with a combined value of $7.6 billion, versus 47 with a combined value of $968 million at the start of the year. Real Capital bases REO values on the prices at which the assets most recently sold for.

The largest assets added to REO since mid-February include the Cosmopolitan hotel and resort development in Las Vegas, which Deutsche Bank took over some eight months after developer Bruce Eichner defaulted on a loan against the 2,999-unit project.

The Cosmopolitan and other fumbling mega-projects, such as the 2,097-unit Riviera Hotel & Casino, whose owners defaulted on a $218 million loan, have made Las Vegas the most prominent market for troubled assets. It has 107 such properties with a combined value of $8.9 billion.

Manhattan ranks second with $6.2 billion worth of properties, which include three office buildings with a combined 1.5 million square feet put on the market last month by the financially-struggling AIG. The insurance giant's listings include its headquarters at 70 Pine St., which is expected to fetch $100 million.

Manhattan's distress also includes 1330 Avenue of the Americas, a 535,600-sf office building that Caisse de depot et placement du Quebec last week took over after foreclosing on $130 million of mezzanine financing that was provided to the property's previous owner, Macklowe Properties. Real Capital classifies the property as distressed because Caisse has not yet paid off the property's $500 million of senior debt that is held by Deutsche, which had securitized $187 million of it through COMM, 2007-FL14.

Retail, the property sector with the largest volume of troubled assets at $29.8 billion, has also sustained the largest increase in volume as it's more than quintupled from the $4.5 billion at the start of the year.

The jump was driven largely by the bankruptcy filing earlier this month by General Growth, which owns stakes in 200 million sf of mall space. Real Capital cited General Growth as the leading holder of potentially troubled assets in a report last December.

Ruderman noted that a big chunk of retail's new distress was also driven by shopping centers that got into trouble after their national chain-store tenants went bankrupt. Recent examples include the 414,082-sf Phillips at Sunrise Shopping Center in Massapequa, N.Y., where Circuit City and Linens N Things, which accounted for one-third of the center's income, both went bankrupt last year.

A $65 million loan on that property is securitized through Bear Stearns Commercial Mortgage Securities Trust, 2006-PWR14, and was moved into special servicing earlier this month after the center's owner had sued his lender and loan servicers, alleging that the property's loan was based on an inflated valuation.

Hotels sustained the second largest increase in troubled assets this year with a 165 percent hike to $10.31 billion, while the industrial sector's volume increased 122 percent to $2.23 billion.

Source: Real Capital Analytics

The hotel sector's increase was driven by February's Chapter 11 bankruptcy filing by Trump Entertainment Resorts, which at the time owned three Atlantic City, N.J., hotel-casinos: Trump Marina Hotel Casino, Trump Taj Mahal Casino Resort and Trump Plaza Hotel and Casino.

The biggest chunk of fresh trouble in industrial is, surprisingly, owned by General Growth - a 450,000-sf flex building in West Windsor, N.J, that was once used for agricultural research by the American Cyanamid division of Wyeth. General Growth, which acquired the central New Jersey property for $57.4 million in 2004 as part of its $12.6 billion purchase of Rouse Co., had planned to convert the site to mixed-use.

The growth in distressed industrial properties was also propelled by the bankruptcy filing in March by Meruelo Maddux Properties Inc., a Los Angeles developer.

Development, which includes projects that are under way and raw land slated for projects, registered a 79 percent increase in distressed assets to $18.27 billion.

High-profile development properties added to the list this year include the $2 billion Xanadu shopping and entertainment complex in East Rutherford, N.J., whose ownership group last month sued Lehman Brothers for allegedly not releasing its share of $200 million of financing for the project.

Comments? E-mail John Covaleski or call him at (215) 504-2860, Ext. 208.