Commercial Foreclosures Spike By Nearly 120% In The Last 12 Months

Since March 2023, 625 commercial loans have been foreclosed on — a 117% increase over the previous year, according to real estate research and data analysis firm ATTOM.

It's another data point illustrating how deep the commercial real estate sector's problems go. It's also alarming because the volume of commercial debt that can still go bad is massive.  

The implications for the economy are frightening to contemplate and each day, America's commercial real estate sector takes another step toward the abyss. Commercial real estate foreclosures have been climbing since hitting a low of 141 in May 2020. The 625 foreclosure figure is the second-highest since ATTOM started analyzing the data in 2014 when there were 889 foreclosures. 

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If commercial vacancies persist, it's likely the previous record will be broken. The average vacancy rate in commercial properties hit an all-time high of 19.8% in the first quarter, according to a Moody's Analytics report. That exceeds the previous record of 19.6% set in the fourth quarter of 2023.

A 20% vacancy rate for six consecutive months is catastrophic for the balance sheets of most commercial real estate developers or property owners, who depend on buildings being 95% occupied by long-term tenants that are locked into scheduled rent increases. If the 95% occupancy target isn't hit, the property is likely to lose money and the developer will be unable to service the debt secured by the property.

Anyone who has financed a home knows that foreclosure proceedings begin when mortgage payments stop. The process isn't any different for commercial properties. Although the full measure of the pain hasn't been felt yet, nearly $3 trillion in commercial loan debt will come due between now and 2027. In the past, developers could refinance their debt at borrower-friendly interest rates that don't exist today.

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When developers took out the loans that are set to mature by 2027, many assumed they would be able to roll their debt over into another loan as they had in the past. But now, if they can refinance the debt, the interest rates will be between 6% and 7% — not the 2% or 3% their existing loan was for. And now, refinancing the debt is contingent on proving their assets aren't toxic.

Banks are unlikely to lend or refinance debt on assets with 20% vacancy rates. If developers can't get financing, they'll be foreclosed on. That almost guarantees that commercial asset foreclosures will match or exceed their record high of 889 in the next few years.

Regional banks' exposure to commercial loans is causing concerns for many economic analysts and observers. Some estimate the coming foreclosure crisis could be worse than 2008, while others think it will not reach that extent.  A better question might be how to turn America's millions of square feet of vacant commercial real estate from a toxic asset back into an economically viable investment.

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