Archives for April 2024

The commercial real estate market is starting to buckle under the weight of higher interest rates and remote work.

There were 625 commercial real estate foreclosures in March, up 6% from February and 117% from the same time last year, according to a new report published by real estate data provider ATTOM.

The figure is calculated based on commercial properties with at least one foreclosure filing — including default notices, scheduled auctions and bank repossessions — entered into the ATTOM Data Warehouse during the month.

California had the highest number of commercial foreclosures in March, with 187 properties. While that marked an 8% decrease from the previous month, it is a stunning 405% jump from the previous year.

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“California began experiencing a notable rise in commercial foreclosures in November 2023, surpassing 100 cases and continuing to escalate thereafter,” the report said.

New York, Florida, Texas and New Jersey also saw notable increases in commercial foreclosures last month.

Foreclosures have steadily risen since May 2020, when they hit a record low of just 141 properties. At that time, the U.S. economy was still in the throes of the COVID-19 pandemic, and many lenders offered commercial loan forbearance to borrowers to help them stay afloat.

However, those agreements have largely expired and now, the commercial real estate market is struggling with a number of challenges, including higher interest rates and waning demand for office space as more companies allow employees to work from home.

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The Federal Reserve raised interest rates to the highest level since 2001 in response to sky-high inflation. Rates are poised to remain elevated for some time, as policymakers have signaled they are not prepared to start reducing rates until they are more confident that inflation has returned to 2%.

About $1.5 trillion in commercial mortgage debt is due by the end of 2025, but steeper borrowing costs, coupled with tighter credit conditions and a decline in property values brought on by remote work, have increased the risk of default.

Roughly $929 billion worth of commercial real estate loans are set to mature this year, according to the Mortgage Bankers Association. Borrowers may have no choice but to refinance with significantly higher interest rates or sell their properties at a steep loss.

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Complicating the matter is the fact that small and regional banks are the biggest source of credit for the $20 trillion commercial real estate market, holding about 80% of the sector’s outstanding debt. Regional banks were at the epicenter of the upheaval within the financial sector last year following the collapse of Silicon Valley Bank, and there are concerns that the turmoil could make lending standards drastically more restrictive.

During a credit crunch, banks significantly raise their lending standards, making it difficult for businesses or households to get loans. Borrowers may have to agree to more stringent terms like high interest rates as banks try to reduce the financial risk on their end.

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Federal Reserve Chair Jerome Powell said in March that commercial real estate woes will likely lead to some bank failures, but do not pose a larger threat to the financial system.

“We have identified the banks that have high commercial real estate concentrations, particularly office and retail and other ones that have been affected a lot,” Powell said while testifying on Capitol Hill. “This is a problem that we’ll be working on for years more, I’m sure. There will be bank failures, but not the big banks.”

Source: “Commercial real estate foreclosures jumped 117% in March as trouble looms”

DXD Capital, a real estate and private equity firm, is set to launch its latest venture — a climate-controlled self-storage facility — in Albuquerque’s Northeast Heights later this fall.

Located at 8041 Ventura St. NE, the three-story facility will measure in at 96,153 square feet with 819 storage units. ARCO/Murray and GMA Architects are the contractors on the $16 million building.

“As single-family homes, multifamily and senior living have been developed and infilled along Paseo [Del Norte Boulevard], the demand for storage has increased, “JT Mitchell, market research specialist at DXD Capital said. “By the time we open, it’ll be a decade since this area has seen any new self-storage to meet the demand that has originated from all this new development along Paseo.”

Although the first floor is nearly finished, construction on the total project is anticipated to finish before the end of the year, Mitchell said. The project, which began last November, has not faced any delays, he added.

As part of the planning process, DXD held two community meetings in September and December 2022 to gauge the public’s concerns, Mitchell said in an email statement. The building, which contains a basement floor, will be limited to a height between 20 and 26 feet after discussions revealed concerns over the 38-foot limit allowed under the MX-L zoning code, according to a site plan.

“We wanted to minimize the height as much as possible, so we are building a below-grade basement level at a substantial added cost,” Mitchell said.

The firm has more than 37 projects in various pre-development stages across the U.S.

Extra Space Storage (NYSE: EXR), a nationwide self-storage operator, will manage the Northeast Heights building. In total, the company owns and operates over 3,500 self storage properties across the country, according to its website.

Source: “DXD Capital gives update on NE Heights development“

The commercial real estate market is facing mounting pressure as higher interest rates and the shift to remote work weigh heavily on the sector. A new report by real estate data provider ATTOM reveals a significant uptick in commercial real estate foreclosures, signaling growing distress in the industry.

According to the report, there were 625 commercial real estate foreclosures in March, marking a 6% increase from February and a staggering 117% surge compared to the same period last year. These foreclosures encompass properties with at least one foreclosure filing, including default notices, scheduled auctions, and bank repossessions.

California led the pack with the highest number of commercial foreclosures in March, recording 187 properties. While this represented an 8% decrease from the previous month, it marked a remarkable 405% jump from the previous year. Other states such as New York, Florida, Texas, and New Jersey also experienced notable increases in commercial foreclosures.

The rise in foreclosures has been a persistent trend since May 2020, when they hit a record low of just 141 properties. During the height of the COVID-19 pandemic, lenders extended commercial loan forbearance to help struggling borrowers, but as those agreements expire, the commercial real estate market faces renewed challenges.

The Federal Reserve’s decision to raise interest rates to the highest level since 2001 in response to inflationary pressures has further strained the market. With rates expected to remain elevated, borrowing costs have increased, exacerbating the risk of default for commercial real estate owners.

Compounding the issue is the substantial amount of commercial mortgage debt due by the end of 2025, estimated at around $1.5 trillion. Tighter credit conditions and declining property values, driven by remote work trends, have intensified the risk of default and forced property owners to consider refinancing at higher rates or selling at a loss.

The reliance of the commercial real estate market on small and regional banks adds another layer of complexity. Regional banks, which hold about 80% of the sector’s outstanding debt, are grappling with the fallout from the financial sector upheaval, including the collapse of Silicon Valley Bank last year. Concerns loom over the potential tightening of lending standards, further exacerbating challenges for property owners.

In response to these challenges, some commercial real estate owners are exploring innovative solutions such as tokenization to unlock value from their properties. However, for heavily indebted properties, even tokenization may not suffice to offset the impact of declining property values and mounting debt burdens, underscoring the urgent need for strategic interventions in the face of evolving market dynamics.

Source: “Commercial Real Estate Foreclosures Surge Amid Economic Challenges“

The number of commercial foreclosures in the U.S. has steadily increased, from a low of 141 in May 2020 to 625 in March 2024, according to an updated report from ATTOM.

That represents a 6% increase from the prior month and a 117% increase from last year. The real estate data tracking firm also noted that California, New York, and Florida were the states with the most foreclosures.

New York had a total of 61 commercial foreclosures in March 2024, a 5% increase from the prior month and a 65% increase from a year ago. Florida saw increases of 30% and 107%, respectively. Texas saw increases of 31% and 129%, and New Jersey saw increases of 31% and 133%.

Foreclosure filings on commercial real estate property in California in January 2024 were triple the number of foreclosures in January 2023, according to ATTOM data. Banks in California have a great deal of exposure to commercial real estate with 31% of Golden State bank portfolios carrying three times larger loans than capital.

The recent increase in foreclosures follows a multi-year low of just 141 in May 2020, reflecting the immediate impacts of the pandemic and swift response measures like moratoriums and financial aid for owners.

“Despite challenges like the COVID-19 pandemic and evolving economic policies, the market demonstrated remarkable adaptability,” ATTOM reported. “Initial pandemic-related foreclosures were followed by a stabilization as businesses adjusted to new realities.”

Source: “Commercial Foreclosures Up 117% Year Over Year“