ATTOM’s recent report on commercial foreclosures in the United States notes that there are 635 foreclosure filings as of January 2024. This is up 97% from January 2023, and 17% higher than December 2023; however, ATTOM CEO Rob Barber doesn’t see this as being a bad thing. Barber notes the current meteoric rise in the foreclosure rate isn’t “just a return to pre-pandemic activity levels but also underscores the ongoing adjustments within the commercial real estate sector as it navigates through a landscape transformed by evolving business practices and consumer behaviors.” Put simply, the market is changing and investors need to change with it. Office space vacancy rates are on the rise as businesses and employees alike embrace virtual and hybrid work models. Retail outlets have also been hard hit; a tally of announcements made by large stores in 2023 found that well over 2,800 stores throughout the United States have either closed or are set to do so. On the other hand, industrial real estate has seen a rise in value and will likely continue to perform well due to post-COVID consumer trends. This is especially true for industrial real estate spaces that can be used as warehouses and fulfillment centers for e-commerce stores.
In addition to changing consumer trends, CRE investors are also dealing with high-interest rates that make it difficult if not impossible to refinance loans. Those who took out mezzanine loans have been particularly hard hit, not only due to FED rate hikes but also the credit crunch that saw banks tighten credit standards. About two-thirds of banks tightened CRE loan standards in the fourth quarter of 2023. Regional banks were more likely to tighten than large banks, but experts expect the banking industry overall to tighten CRE standards further in 2024 as the value of commercial real estate investments decreases due to rising foreclosure rates and other factors.
Some states have been harder hit by the rising CRE foreclosure rate than others. California alone has 181 commercial real estate foreclosures in January 2024. This is 72% higher than the previous month and a whopping 174% higher than the state’s CRE foreclosure rate in January 2023. In New Jersey, the CRE foreclosure rate for January 2024 was 38% higher than the preceding month and 157% higher than the same point in time last year. Texas’s CRE foreclosure rate for January 2024 was up 17% from December 2023 and 143 from the previous year. Florida saw a mere 18% increase month on month and a 42% jump in CRE foreclosures from last year. On the other hand, New York’s CRE foreclosure rate is 12% lower than the previous month and 12% lower than the previous year.
Some CRE investors see the current market conditions as an opportunity. As commercial real estate loses value, investors could acquire properties for a fraction of their former value. However, such opportunities should be approached with plenty of caution and investors will want to thoroughly research any potential purchases carefully in order to avoid potential pitfalls. While office space could be turned into mixed-use space for residential and commercial use, investors would need to consider local zoning laws, development costs, financing, and a host of other factors before making a purchase. Converting retail, office, or other CRE space into an industrial venue is likewise fraught with risks and potential pitfalls. On the flip side, those who are familiar with a local market may be able to turn significant profits by taking advantage of previously unheard-of deals. Furthermore, FED rate cuts could offer the market significant relief this year. While the FED declined to lower rates at the end of 2023, it signaled that several rate cuts were possible this year.
Rising CRE foreclosure rates aren’t all bad news. Rather, the market is adapting to current trends. What’s more, businesses and investors alike are adapting to new realities, and the foreclosure rate is set to stabilize at pre-pandemic levels. Even so, CRE investors will want to navigate current market conditions with care, especially when making investment decisions related to foreclosed commercial venues. The market is still not entirely stable and only time will tell what CRE market conditions will be like for the remainder of the year.
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