Commercial Foreclosures Threatening the Horizon

Even before the shock of home foreclosures have waned, commercial foreclosures are threatening the horizon. Office and retail outlet shut downs will soon spell disaster. The loss from commercial real estate loans are adding to the worries of the lenders. The amount could cross billions of dollars.

In only six months the defaults on office, retail outlets and hotels have doubled. It is 80% increase for apartments and industrial complexes according to the findings of Reis Inc.

Homeowners are falling back at the rate of four times more than commercial house owners but the sudden increase of the latter has made those in the industry worried about the repercussions on the economy from these commercial foreclosures. It might well give the financial system another bitter shake. Already commercial real estate loans worth of bout $73 billion are in some stage of trouble as per the findings of Real Capital Analytics.

The situation is grim in Palm Beach and Broward counties. 19 commercial units worth about $177 million are in choppy waters – either in default, foreclosed or repossessed. Even South Florida is being affected with many owners of commercial buildings being late in mortgage payments. These have become non-performing properties according to Jonathan Kingsley of Grubb & Ellis Co of Miami.

The banks are confused about the next course of action. The sheer numbers of commercial foreclosures and the huge numbers involved might persuade them to write down many of the loans to realistic levels. Kingsley commented, “That’s when we’ll hit the point of capitulation in the market.”

At this stage the exact damage to the economy cannot be gauged but the stress tests are likely to underestimate it. It seems that the recession will worsen and if that happens the losses from the commercial loans could rise or $53 billion.

The stress test has excluded a good chunk of the local lenders of the regions who hold $3.5 trillion of the national commercial real estate loans. If the wave hits they are the most vulnerable. Hessam Nadj or Marcus & Millichap Real Estate Investment Services said, “Because of the severity of the economic downturn, now the pressure … for commercial real estate, is much higher.”

The failing economy has forced many business concerns to cut down in size while some others have completely downed shutters. The landscape is dotted with not only vacant foreclosed houses but also empty shops, business space and warehouses.

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