Rethinking CRE Foreclosure Statistics

Additional and perhaps dramatic information released recently about commercial real estate delinquencies and their risks posed to the banking system has caught the eye of many.

Foreclosure dat from ATTOM and the update from the Mortgage Bankers Association about its loan maturity information, however, do not materially change Marcus & Millichap’s perspective on whether CRE poses a risk to the banking system.

“The threat remains overblown,” said John Chang, the firm’s Senior Vice President and National Director of Research and Advisory Services. “It does, however, add some color to the conversation.”

ATTOM reported a sharp upswing in commercial real estate property foreclosures with the count nearly double the same month last year with 635 commercial real estate foreclosure filings in January.

Speaking during one of his firm’s weekly news videos, Chang said that on the surface, that’s a big jump, and the rate of increase does raise some concerns.

Instead, he considers that between 2014 and 2019 – what Chang characterizes as the normal years for commercial real estate – there was an average of nearly 500 foreclosures per month, so 635 properties entering foreclosure in a month “doesn’t seem so extreme.”

Chang also notes that since the onset of COVID-19 in April 2020, the number of properties entering foreclosure was down significantly.

The average number of foreclosures between April 2020 and the end of 2022 was just 255 per month. Since then, the number has been climbing steadily.

“The foreclosure downturn was partially driven by COVID-related policies that temporarily reduced foreclosure risk,” Chang said. “And now we’re seeing some of the deferred foreclosures show up.

“But I also suspect that many of the foreclosures are in the hardest hit property segment, older urban office buildings, and that segment poses the greatest risk of foreclosures going forward.”

Meanwhile, foreclosures in highly sought-after properties, such as industrial, apartments, self-storage, and well-located retail, will be very limited, he said.

Furthermore, new FDIC guidance empowers banks to offer commercial real estate borrowers extensions and other workout options at their discretion.

And the new data from the Mortgage Bankers Association gives some insights into how much of the $728 billion of debt that was supposed to mature in 2023 was pushed back.

Compared to what was reported last year, the total debt maturing in 2024 increased by $270 billion.

Maturities in 2025 increased by 34 billion, and the 2026 total rose by 75 billion.

“No one that I know of has the exact numbers on how much of the new balances are deferred versus new loans, but it’s likely most of the increase, at least in 2024, is deferred debt,” Chang said.

Using rough math, somewhere between $300 billion and $500 billion of last year’s maturing debt was likely deferred, he said. Office property debt maturing in 2024 had the greatest increase, rising by $89 billion to a total of 206 billion.

Industrial was next, with a $48 billion gain, to a new total of 110 billion, followed by a $45 billion gain in the 2024 hotel maturities.

Retail debt maturing in 2024 only went up by $8 billion, and multi-family increased by just $2 billion.

Chang thus determines that it looks like the loan extension model that was so effective during the global financial crisis and the health crisis is in use.

He said its effectiveness for averting a significant wave of distress will likely depend on three major factors:

First, what happens with the economy this year, whether we achieve a soft landing, and how the economy and inflation impact rate decisions by the Federal Reserve?

Second, what happens with interest rates this year, whether they go down, how much they go down, and when they go down?

And finally, how the real estate market performs, what happens with sales velocity, the expectation gap, and pricing.

Office properties come with one other variable: whether employees return to the office in greater numbers.

“Obviously, some commercial real estate will face distress, and there will be some foreclosures, but I think we’ll see a ripple, not a tsunami,” Chang said. “Therefore, I still think the risk is low and the banking system will probably be just fine.”