The commercial real estate market has struggled to stabilize after the COVID-19 pandemic, as seen by the 117% year-on-year rise in foreclosure rates. The office sector, which accounts for over 40% of the value of distressed properties in the United States, is facing the greatest headwinds due to cratering demand for office space amidst an increase in hybrid and virtual work arrangements. However, it’s not the only type of commercial real estate that’s struggling. More than $67 billion in apartment CRE is in potential distress. A significant percentage of retail and hotel properties are in significant distress. Even so, some cities and municipalities are facing greater pain than others.
California is by far the state with the highest commercial real estate foreclosure rate, with nearly 190 CRE foreclosures in March 2024 alone. The rate is 8% lower than the previous month but over 400% higher than this same point in time last year. The San Francisco office building that was once home to Burning Man headquarters just sold for only 10% of its 2016 asking price. Eventbrite’s former home recently sold for 75% less than its previous sale price. What’s more, CRE investors in the Golden State aren’t the only ones feeling the pain. A recent Bloomberg analysis discovered that nearly 33% of registered banks in California have CRE debt that’s at least 300% the size of their capital.
New York, which comes in second place, has had 61 foreclosures in March 2024, up 65% year-on-year. Nearly a quarter of the Empire State’s banks have CRE debt that’s at least 300% higher than their total capital. Florida is a close third with 60 foreclosures, up over 100% from the previous year. Texas comes in fourth place with 55 foreclosures, up 129% year-on-year. Pennsylvania had 27 foreclosures last month, up 35% YoY. Georgia’s 21 CRE foreclosures for March 2024 represent a 163% rise from the previous year. Ohio had 19 foreclosures, but it’s the only state to see a decrease in the foreclosure rate, which was 34% higher last year. Connecticut comes in ninth place with 18 foreclosures. It may not seem like a big deal; however, it’s a whopping 500% increase from the previous year. Illinois comes in tenth place with 17 foreclosures.
Only time will tell what happens in the future, but there doesn’t appear to be a fast end to the current pain the CRE market is experiencing. Seasoned economist Larry Summers is warning that the FED may once again raise interest rates in 2024 due to rising inflation. This would make it even more difficult for struggling investors to obtain the financing needed to avoid default or to purchase distressed real estate. What’s more, about $1.2 trillion in loans will mature by the end of 2025, putting further pressure on a market that is already seeing a surge in the foreclosure rate. While some are hopeful about the prospects of office buildings being converted into mixed-use developments and there is certainly demand for these types of properties, experts note that office tower prices would need to decrease by an additional 50% for conversions to make sense. In any case, banks already struggling to deal with loads of bad CRE debt will likely be unwilling or unable to offer financing to CRE developers who want to remodel office space. In short, there is no easy answer to the multiple challenges driving CRE foreclosure rates, which means the odds are that CRE foreclosure rates will continue to rise for the foreseeable future.
Have questions?
If you or someone you know has questions about the current foreclosure climate, we’d be happy to answer your questions:
kellie@peakforeclosure.com
(818) 591-9237