Commercial foreclosures jumped 117% year-to-date in March

The commercial real estate market continues to face challenges, highlighted by a significant increase in property foreclosures.

According to real estate data provider ATTOM, foreclosure activity surged by 117% year-over-year in March, with 625 foreclosures reported. This marks a stark contrast to the pandemic lows, when foreclosures hit a bottom of 141 in May 2020.

While COVID-era aid and foreclosure moratoriums helped keep levels low in recent years, the current surge may indicate a normalization in the market, similar to what has been observed in residential real estate. Despite the increase, commercial foreclosures are still below the 2014 peak of 889.

The rising trend in foreclosures can be attributed in part to higher interest rates, which have made it difficult for the sector to service debts and have raised concerns about widespread defaults.

With billions in commercial debt maturing, borrowers are facing the choice of refinancing at higher rates or selling their properties at significant discounts. Analysts are concerned that those extending their maturities are simply postponing a wave of distress, given that $2.2 trillion in debt is set to mature by 2027.

The office sector is particularly affected, experiencing falling demand due to the prevalence of remote work. According to the Mortgage Bankers Association, delinquencies in the office segment continued to rise in the first quarter, while rates remained unchanged for other sectors. The delinquency rate for office loan balances of 30 or more days late increased to 6.8%, up from 6.5% in the previous quarter.

Jamie Woodwell, Head of Commercial Real Estate Research at the Mortgage Bankers Association, noted that the office sector is facing challenges adjusting to higher interest rates and uncertainty surrounding property values, particularly with the ongoing shift to hybrid work.

Fitch Ratings recently warned of a rising global contagion risk from commercial real estate losses. The agency estimates that three-fourths of US conduit office loans will default through 2024. Lower-quality and older vintage office properties are expected to be most at risk, facing significant property value declines and potential obsolescence. This trend is already apparent in some high-profile US office markets and is increasingly seen in gateway European cities with rising vacancies.

Fitch had previously forecasted that the office price crash would be more severe than the 2008 financial crisis.