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More than five years after the pandemic shook the commercial real estate world, a huge amount of office-backed debt remains troubled. Many office buildings—particularly older or underused ones—haven’t recovered, leaving billions of dollars in distressed or delinquent loans still unresolved.

According to Trepp, commercial mortgage delinquency rates rose across all lending sources in the first quarter of 2025. The highest delinquency was in commercial mortgage-backed securities (CMBS), hitting 6.42%, up from the previous quarter. By June, CMBS delinquencies climbed further to 7.13%. Unsurprisingly, the office sector is the most distressed, with delinquency reaching a record 11.08%, surpassing its previous high from late 2024.

Some troubled office towers have changed hands recently—usually at steep discounts—but plenty of properties remain in limbo. Many lenders have opted to extend loan maturities temporarily, waiting to see how the market evolves.

Trepp’s chief product officer, Lonnie Hendry, said in a June webinar that we’re still in the early stages of the distress cycle. He noted that many Class B buildings face long-term functional challenges and predicted it will take time before the full scope of distress becomes clear. In comparison, it took several years for delinquency rates to peak after the Great Recession.

Strategies that worked in past downturns—like loan modifications or waiving financial covenants—aren’t proving as effective now because of how drastically the office sector has changed since 2020.

Steven Ginsberg of Ginsberg Jacobs said some of the usual lender tools no longer move the needle: “Those strategies that used to exist just don’t work anymore.”

On the lending side, strong bank balance sheets have helped banks remain flexible, but lenders are increasingly facing tough decisions. It’s been years since the pandemic triggered widespread shifts in how companies use office space, and lenders are now weighing their options: foreclosures, short sales, or other more creative solutions.

However, foreclosures, particularly in cities like New York and Chicago, can drag on for years. That’s why some lenders are carefully mapping out their next steps, according to Paul Grusecki of Hiffman. He said lenders are trying to maintain control over the process and make calculated moves rather than rushing into repossessing buildings.

Some lenders continue to “extend and pretend,” giving borrowers more time while adding clauses that give lenders leverage later—such as appraisal requirements at the borrower’s expense. But signs of lender impatience are growing. Commercial foreclosures rose 27% between the end of 2023 and 2024, with 725 recorded in December 2024, one of the highest monthly totals in a decade.

Owners, too, are making tough choices. Rising maintenance costs and low tenant demand for outdated offices are pushing some borrowers to give up. Grusecki shared a recent example where a broken rooftop air-conditioning unit pushed a borrower to walk away from the property.

Some property owners who have already invested significant equity are deciding whether it’s worth putting in more money—or if it’s better to cut their losses. This has contributed to an increase in office property sales over the past year, often at deeply discounted prices.

Meanwhile, lenders are using a variety of tactics to deal with distressed loans. Some are negotiating deeds-in-lieu of foreclosure, where the borrower hands over the property without going through lengthy court proceedings. Others are selling the loan itself (note sales), although that’s less common due to the complexities involved.

Market watchers agree that at this stage, factors like interest rates are less important than fundamentals like occupancy, operating expenses, and tenant demand. As John Heiberger of Hiffman National noted, small shifts in interest rates won’t save a building that lacks tenants or faces skyrocketing operating costs.

Despite the challenges, most lenders and borrowers have remained cooperative, recognizing that pandemic-driven market disruption—not bad business practices—is the root cause of the distress. And with many longstanding relationships in the real estate industry, parties are working to reach agreements that let everyone move on and avoid protracted legal battles.

As Ginsberg put it: “A lot of lenders and borrowers are going to deal with each other again. They understand each other, they talk about where things are going to end up and want to get there quickly.”

 

Source: TBJ

 

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Commercial foreclosures are on the rise in Florida as borrowers continue to face significant challenges.

In September, the state saw 70 commercial foreclosures, up from 47 the previous year, with 538 foreclosures reported by late 2024. This marks a notable increase from the record-low figures seen in 2020, according to real estate data provider Attom.

The uptick in foreclosures is largely attributed to higher interest rates, which have increased monthly payments for many borrowers with adjustable-rate mortgages. Additionally, those with expiring low-rate loans are finding it difficult to refinance at current, higher rates. Development site owners are also struggling, as the combination of rising interest rates and elevated construction costs has made it challenging to move forward with projects as their land loan maturity dates approach.

Attom’s report highlights that while commercial foreclosures are rising nationwide, they have not yet reached the levels seen in previous years. In Florida, foreclosures peaked at over 880 in 2015.

 

Source:  OBJ

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In September 2024, there were 695 commercial foreclosures across the United States, according to a recent report from ATTOM. While this figure shows a decline from the 752 foreclosures reported in May, it still indicates a heightened level of risk that surpasses pre-pandemic figures, amid ongoing financial pressures such as rising interest rates, inflation, and changing demand for commercial properties.

California recorded the highest number of foreclosures in the nation for September, with lenders initiating proceedings against 264 properties—up 12% from August and a staggering 238% compared to September of the previous year. New York followed with 92 foreclosures, reflecting a 59% increase from August and a 48% rise year-over-year.

Other states that experienced notable foreclosure activity included Florida, which reported 70 foreclosures, a 21% increase from August and 48% higher than in September 2023. In Pennsylvania, foreclosures jumped 129% from August to September, reaching 32, a 33% increase from the same month last year. Texas had 45 foreclosures, marking a 15% rise from August but a 13% decrease compared to the previous year.

This data encompasses all commercial properties with at least one foreclosure filing in ATTOM’s database, covering all three phases of the legal process: default, auction, and real estate owned.

 

Source:  GlobeSt.

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Many analyst takes on commercial real estate markets have been in terms of where loans stood. This includes CMBS, banks and what have you – but the question has been percentages of delinquencies or properties in special servicing.

There’s been an assumption that banks in particular have been indulging in the practice colloquially called “extend and pretend.” In April, Autonomous Research estimated that 40% of bank CRE loans maturing this year actually being holdovers from 2023 and that banks on average are reserving 8% of their CRE portfolios, which is about five times more than normal. PGIM Real Estate that expected bank CRE maturities was up 35% from previous estimates.

But where the concrete meets the pavement, if you will, is when lenders take back properties, whether because borrowers have walked away, or the hammer has come down in a foreclosure. That’s on the rise, according to a Wall Street Journal report.

Portfolios of foreclosed and seized properties reached $20.5 billion, according to data from MSCI. That’s a 13% quarter-over-quarter jump and the highest figure since 2015.

Back to extend and pretend. No lender wants to take the keys back. They don’t have the expertise in profitably running a building nor the desire. Legally holding the property means that the value hits the balance sheet in an uncomplimentary way and investors start asking what is going on.

However, delay tactics last only so long because auditors will eventually say the time has come to admit defeat. Then investors can see what is happening and they start asking pointed questions.

Journal graph of the MSCI data shows the total of seized properties over time. The current $20.5 billion isn’t at the heights of the Global Financial Crisis when it was more than double. But the trend line is on an upswing, suggesting a good chance that things could get considerably worse, especially in offices, where only 15% are in the Class-A category, which has maintained values higher values and lower vacancies. The remaining 85% are in potentially big trouble because there is decreasing evidence that they can be saved by would-be tenants.

Higher rates of foreclosures have, in the past, signaled the end of a crisis and the arrival of a bottom. Lenders who take back properties usually want it off their books quickly. That can aid price discovery, as the Journal notes, and help the market start to work again.

Currently, the economy is looking relatively strong, with a first Fed rate cut possibly in the offing in September. Should there be a slide, however, CRE markets could get far worse.

 

Source:  GlobeSt.