Commercial real estate foreclosures spiked to a decade-high

Buckling under the weight of crushing interest rates and rising vacancy levels, commercial property loans are going under at the fastest pace in nearly a decade.

According to data provider MSCI, the value of foreclosed and seized commercial property held by lenders rose to $20.5 billion in the second quarter—an increase of 13% from the previous quarter.

This figure includes office buildings, apartments, and other commercial properties.

As The Wall Street Journal reported, the value of foreclosed commercial property has reached the highest level since the beginning of 2015 and has more than doubled since pre-Covid times.

Foreclosures have been steadily climbing since the pandemic when public lockdowns prevented office employees from working on-site.

Since then, remote work has become the norm for a large segment of the workforce, with corporations repurposing or downsizing office space in downtown city centers.

As Creditnews reported, office vacancy rates eclipsed 20% in the first quarter, the highest level ever recorded. The average vacancy rate was below 13% before the pandemic.

Now, lenders are realizing that their commercial property portfolios might never recover, so they’re taking decisive action to stop the bleeding.

“Lenders will do everything in their power to avoid” major losses and expenses from foreclosure actions, said Jade Rahmani, an analyst at Keefe, Bruyette & Woods.

Experts say the commercial property downturn could accelerate in the coming years because a huge swathe of existing properties are “basically worth nothing.”

If the commercial property market implodes, experts say another slew of high-profile bank failures is in the cards.

Is there a crisis brewing beneath the surface?

More than a year after the Silicon Valley Bank collapse and the following regional bank crisis, Wall Street is warning of a new wave of bank failures.

According to the Pacific Investment Management Company, better known as PIMCO, some regional banks have “very high” exposure to bad commercial real estate loans.

“The real wave of distress is just starting,” said John Murray, PIMCO’s managing director.

Bloomberg echoed Murray’s concern in a March report showing that 22 regional banks had crossed dangerous thresholds on their commercial real estate portfolios.

These banks have commercial real estate loan portfolios that are at least three times bigger than their capital and have expanded their commercial lending by at least 50% over three years.

Experts say that regional banks often are too small to write off these loans scot-free. Meanwhile, larger banks have been quietly unwinding their commercial real estate loans.

As The New York Times reported, banks like Goldman Sachs, Deutsche Bank, and CIBC have collectively offloaded hundreds of millions of dollars worth of office mortgages since late 2023.

“The banks know they have too many loans on their books,” Jay Neveloff, a real estate lawyer at Kramer Levin, told The Times.