Commercial real estate foreclosures have spiked 117% over the past year
The office sector continues to lead the commercial real estate downturn, with delinquency rates for the sector continuing to rise last quarter.
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- Commercial foreclosures jumped 117% year-to-date in March, data from ATTOM shows.
- It reflects difficulty for the real-estate market, which has been hurt by high interest rates.
- Offices have led the drawdown, with sector delinquency rates still rising in the first quarter.
The commercial real estate market is still struggling, made all the more clear by the rapid upswing in property foreclosures.
Foreclosure activity jumped by 117% year-over-year in March, real estate data provider ATTOM reported on Wednesday. That indicates 625 foreclosures, a stark contrast to the pandemic lows, where foreclosures bottomed at 141 in May 2020.
As COVID-era aid and foreclosure moratoriums helped keep levels low in recent years, the current surge could in part reflect some normalization, as has been happening in residential real-estate. While high, commercial foreclosures are still under a 2014 peak of 889.
The rising trend partly stems from higher interest rates, which have battered the sector's ability to service debts and raised concerns about defaults rippling through the market.
With billions in commercial debt maturing, tighter monetary policy has forced borrowers to either refinance at higher rates or sell their properties at steep discounts. For those that extend their maturities, analysts worry it's just delaying a wave of distress, with $2.2 trillion in debt coming due by 2027.
Bearing the brunt of these issues is the office sector, which is also burdened by falling demand amid entrenched remote work.
According to the Mortgage Bankers Association, offices were the only commercial segment where delinquencies kept rising in the first quarter, with rates unchanged for all other sectors. 6.8% of office loan balances were 30 or more days late, an increase from last quarter's 6.5%.
"Loans across property types are adjusting to higher interest rates and uncertainty about property values, but the continued fog around the impact of hybrid work adds another challenge for office properties and their loans," Head of Commercial Real Estate Research Jamie Woodwell said in the report.
Earlier this month, Fitch Ratings warned of a rising global contagion risk from commercial real-estate losses. Through 2024, its estimates that three-fourths of US conduit office loans will default.
"Lower-quality and older vintage office properties should see the greatest risk from this reduced demand, and are likely to face outsized property value declines and even obsolescence," it said. "This is already evident in some high-profile U.S. office markets and, increasingly, in gateway European cities with rising vacancies."
The ratings agency previously forecast the office price crash to be worse than 2008's financial crisis.