Commercial property foreclosures have surged nearly 120% in the past 12 months
According to real estate research and data analytics firm ATTOM, 625 commercial loans have been foreclosed since March 2023, up 117% from the previous year.
This is another data point that shows just how serious the problems are in the commercial real estate sector, and the sheer volume of commercial debt that could become non-performing is also worrying.
The economic impact is frightening to contemplate, with America's commercial real estate sector moving one step closer to the abyss every day. Commercial real estate foreclosures have been on the rise since hitting a low of 141 in May 2020. The 625 foreclosures are the second highest since ATTOM began analyzing the data in 2014 (889).
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If retail vacancy rates continue to rise, they are likely to break previous records. According to a Moody's Analytics report, the average retail vacancy rate hit an all-time high of 19.8% in the first quarter, beating the previous record of 19.6% recorded in the fourth quarter of 2023.
A 20% vacancy rate for six consecutive months is devastating to the balance sheets of most commercial real estate developers and property owners because they rely on 95% of their buildings being occupied by long-term tenants and are required to provide regular rent increases. If 95% occupancy is not achieved, the property will likely go into the red and the developer will be unable to repay the debt secured by the property.
Anyone who has ever taken out a mortgage knows that when mortgage payments stop, the foreclosure process begins. For commercial real estate, the process is no different. While the full extent of the pain has yet to be felt, roughly $3 trillion in commercial mortgage debt comes due between now and 2027. In the past, developers were able to refinance the debt at more favorable interest rates for borrowers, but that no longer exists.
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When real estate developers took out loans maturing through 2027, many assumed they would be able to refinance that debt into another loan, as they have in the past. But now, if they can refinance the debt, they'll pay 6% to 7% interest, instead of the 2% to 3% that the existing loans charged. And now, to refinance the debt, they must prove that the assets aren't distressed.
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Banks are unlikely to lend or refinance properties with 20% vacancy rates, and if developers can't get financing, they will foreclose. This means commercial foreclosures are almost certain to match or exceed the all-time high of 889 in the coming years.
Community banks' exposure to commercial loans has raised concerns among many economic analysts and observers. Some predict the foreclosure crisis could be worse than 2008, while others think it won't be as bad. A more pertinent question might be how to transform America's millions of square feet of vacant commercial real estate from toxic assets into economically viable investments.
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The article “Commercial Real Estate Foreclosures Surge Nearly 120% in Past 12 Months” originally appeared on Benzinga.com.
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