Downward angle icon Downward angle icon. Shutterstock/Getty Images Commercial real estate foreclosures rose 117% year-to-date in March, according to ATTOM data, reflecting a challenging real estate market hit by high interest rates. Office property saw a notable decline, with delinquency rates in the sector continuing to rise in the first quarter.
The commercial real estate market continues to struggle, as made even more evident by the sharp increase in real estate foreclosures.
Real estate data provider ATTOM reported Wednesday that foreclosures rose 117% in March compared to a year ago, with 625 foreclosures reported, compared to a pandemic low of 141 in May 2020.
COVID-19 aid and foreclosure moratoriums have kept foreclosures low in recent years, so the current surge could reflect a return to normalcy similar to that occurring in residential real estate. Commercial real estate foreclosures, while high, remain below their 2014 peak of 889.
The upward trend is partly due to rising interest rates, which are straining the banking industry's ability to repay debt and raising fears of defaults spilling over into the market.
With billions of dollars in commercial debt coming due, the tightening monetary policy is forcing borrowers to either refinance at higher interest rates or sell their properties at steep discounts. As for borrowers who are extending maturities, analysts worry it will only delay the wave of distress, with $2.2 trillion in debt due to mature through 2027.
The office sector is bearing the brunt of these problems, with the drop in demand due to the establishment of remote working also weighing on it.
According to the Mortgage Bankers Association, office was the only commercial sector where delinquency rates continued to rise in the first quarter, while delinquency rates in other sectors remained steady: 6.8% of office loan balances were 30 or more days past due, up from 6.5% in the previous quarter.
“While lending across all property types is adapting to rising interest rates and uncertainty in property values, continued uncertainty around the impact of hybrid working is creating new challenges for office properties and their lending,” Jamie Woodwell, head of commercial real estate research, said in the report.
Fitch Ratings warned earlier this month of a growing risk of global contagion from commercial real estate losses, with the firm predicting that three-quarters of U.S. conduit office loans will default by 2024.
“Lower quality and older office buildings are most at risk from declining demand and are likely to face larger declines in property values and deterioration,” the firm said. “This is already evident in major US office markets and is becoming increasingly evident in major European cities where vacancy rates are rising.”
The ratings agency previously predicted that the collapse in office prices will be worse than the 2008 financial crisis.