Thomas Michaud, CEO of Stifel subsidiary KBW, evaluates regional banks, commercial real estate and the stability of the Basel III proposals.
The commercial real estate market is beginning to collapse under the strain of rising interest rates and remote work.
According to a new report from real estate data provider ATTOM, there were 625 commercial property foreclosures in March, up 6% from February and 117% from the same time last year.
The figure is calculated based on commercial properties with at least one foreclosure filing, including notices of default, scheduled auctions and bank foreclosures, entered into the ATTOM data warehouse during the month.
California had the most commercial property foreclosures in March with 187, down 8% from the previous month but up a staggering 405% from a year ago.
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“California began to experience a notable increase in commercial residential foreclosures beginning in November 2023, with the number exceeding 100 and continuing to increase since then,” the report said.
Signage is displayed on the exterior of the Westfield San Francisco Centre in San Francisco on April 13, 2022. (Justin Sullivan/Getty Images/Getty Images)
New York, Florida, Texas and New Jersey also saw notable increases in commercial property foreclosures last month.
Foreclosures have been rising steadily since hitting a record low of just 141 in May 2020. At the time, the U.S. economy was still in the grip of the COVID-19 pandemic and many lenders were offering payment holidays on commercial loans to help borrowers stay afloat.
However, these agreements have largely expired, and the commercial real estate market now faces a number of challenges, including rising interest rates and lower demand for office space as more companies allow their employees to work from home.
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In response to soaring inflation, the Federal Reserve raised interest rates to their highest level since 2001. Policymakers have signaled they are not ready to cut rates until they are confident inflation is back at 2%, meaning rates are likely to remain high for the time being.
The HSBC Tower at 452 Fifth Avenue in New York City is pictured on February 11. (Michael Nagle/Bloomberg via Getty Images/Getty Images)
With roughly $1.5 trillion in commercial mortgage debt coming due through the end of 2025, a combination of rising borrowing costs, tighter credit terms and declining real estate values due to remote working is increasing the risk of default.
About $929 billion worth of commercial real estate loans are coming due this year, according to the Mortgage Bankers Association, and borrowers may have no choice but to refinance at significantly higher interest rates or sell their properties at a big loss.
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Complicating the issue is the fact that small and regional banks are the largest providers of credit in the $20 trillion commercial real estate market, holding about 80% of the sector's outstanding debt. Regional banks have been at the center of the financial sector turmoil following the collapse of Silicon Valley Bank last year, raising concerns that the turmoil could lead to a much tighter lending standard.
Federal Reserve Chairman Jerome Powell speaks during a press conference following the Federal Open Market Committee meeting in Washington, DC on March 22, 2023. (Al Drago/Bloomberg via Getty Images/Getty Images)
During a credit crunch, banks significantly raise their lending standards, making it harder for businesses and households to get loans. Borrowers may have to agree to tougher terms, including higher interest rates, as banks try to reduce their own financial risk.
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Federal Reserve Chairman Jerome Powell said in March that while problems in commercial real estate would likely lead to some bank failures, they did not pose a major threat to the financial system.
“We have identified banks that have concentrations in commercial real estate, particularly office and retail and other properties that have been significantly affected,” Powell said in testimony before Congress. “This is something that we will be dealing with for years to come. Bank failures will occur, but they will not be the big banks.”