America's troubled commercial real estate industry avoided a sector-wide meltdown in 2024, but that doesn't mean it was a good year. A recent study by real estate data firm ATTOM showed an alarming increase in commercial real estate foreclosures in the final quarter of 2024. Their data shows foreclosure activity was up by 48% nationwide in comparison to the same time one year prior.
September 2024 saw a whopping 695 commercial real estate foreclosures. California, which also has some of the highest property values in the nation, won the dubious distinction of leading the nation in foreclosures. ATTOM's data shows 264 of the 695 September foreclosures were in the Golden State. That was a 12% increase over the August total, but more alarmingly, a 238% increase over the previous year.
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New York was next on the list with 95 foreclosures, which was a 58% surge from the previous months and 48% more than September 2023. Both states have extremely active real estate markets in major population centers, meaning the foreclosures likely represented billions in losses for the affected banks. Although these numbers caused alarm, they did not come as a surprise.
Going into 2024, many economists and real estate observers were worrying about how much commercial real estate debt was on the books as unrealized losses for America's financial institutions. "The Bear Trap Report" founder Larry McDonald told Fox's Maria Bartiromo that $700 billion in commercial loans were set to mature in 2024.
McDonald described it as "a slow-moving train wreck," and darker days may be on the horizon. When McDonald made his dire prediction, he expressed hope that the debt levels would force the Federal Reserve to lower interest rates significantly by year's end. The rate cuts came, but they were not deep enough to spur America's housing market back to life or stave off the wave of foreclosures reported by ATTOM.
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That could be a problem because many commercial developers and borrowers spent most of 2024 living by an unspoken policy that some referred to as "extend and pretend." Under this policy, commercial lenders extended terms for borrowers in the hopes that people would return to work in large enough numbers to cause commercial property values to rebound. By and large, that hasn't happened and there is even more debt on the horizon.
Speaking to Business Insider, Capital Economics Chief Property Economist Kiran Raichura said another $2.2 trillion in commercial debt will mature by 2027. It's almost impossible to imagine that lenders and developers can push all that debt down the road and have the Federal Reserve rescue them by slashing interest rates into the three or four percent range. That means the recent foreclosure spike might eventually be seen as just a drop in the bucket.
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Raichura said, “We expect evidence of distress to ramp up this year as loan extensions end. Many borrowers will be forced to inject new capital, return assets to lenders or sell into a soft market. Those assets returned to lenders will ultimately end up on the market, helping bring greater pricing clarity and more substantial valuation markdowns.”
ATTOM has been tracking monthly commercial real estate foreclosures since 2014. Their data shows a 10-year-high of 889 foreclosures in September 2014. The $2.2 trillion on the books for 2027 is roughly triple the commercial debt that matured in 2024. Commercial developers and lenders could find themselves in dire straits if that leads to a corresponding 300% increase in foreclosures. Consider this when making long-term real estate investments in the commercial sector.
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