Are We Facing A Commercial Real Estate Foreclosure Crisis?
In recent months, as reports of commercial foreclosure have been on the rise, the question on every investor’s mind is whether the time is right to explore commercial real estate investments. Navigating the current landscape of the commercial real estate market is no straightforward task. In this blog, we’ll dive into the state of the current market, the factors that have led us to this point, and explore what the future holds for the industry.
The Current State of the Commerical Real Estate Market
In today’s commercial market, we are seeing an uptick in foreclosures over the past few months, signaling a troubling trend in commercial real estate. According to Attom and The Real Deal, in August 2023, a foreclosure filing was reported in one out of every 4,113 housing units nationwide, a 7% increase from July. These filings may include default notices, auctions, or bank repossessions. Unfortunately, this signals a looming crisis in the commercial real estate market.
Chicago is feeling the impact of these nationwide trends, especially in its downtown Loop and adjacent neighborhoods, such as Fulton Market. This is the biggest concentration of commercial office and retail space in the city and we are seeing problems arise more and more often. These pains are not only felt by small business owners but increasingly we are seeing large firms in difficult situations. Stories like Palmer House’s lender seizing their retail space and a $237 million foreclosure lawsuit facing the skyrise owners of 161 N. Clark St show us this is becoming a common trend locally and nationwide.
Even with new developments being worked on such as The 78 and North Union, Chicago is still seeing issues arise in the funding of these mixed-use commercial projects. With reports of a 40% reduction in net absorption from last year for Chicago commercial properties, we can see where investors begin feeling reluctant in their investments. Sterling Bay’s Lincoln Yards currently sits in a state of developmental limbo, a great example of both market and private factors that can lead down the path to a commercial real estate foreclosure crisis.
The Foreclosure Crisis: Causes & Consequences
One of the biggest causes we can point to for our current situation is the COVID-19 pandemic. Following the end of lockdowns and restrictions, many experts predicted a strong recovery for the commercial real estate world. Even with things returning to normal and workers heading back into the office, we haven’t seen the turnaround needed. According to Forbes, as of mid-July, Chicago metro commercial spaces have only a 53.4% occupancy rate. This shortfall in office and retail occupancy rates has led to our current commercial real estate foreclosure crisis.
Another factor to examine is the shifting in leases happening due to post-pandemic behavior changes. With a large focus on work-from-home or hybrid working models, many large corporations are simply reducing their office space footprint. In fact, it’s expected to happen to 15-20% of office buildings in the next 5 years. Whether it be renegotiating for a smaller space or leaving a building entirely, these moves massively affect our current crisis.
We can also place some weight on the simple importance of the inherent or perceived value of these commercial spaces. Chicago and NYC are both expected to experience drops in commercial property values as much as 35%. In comparison, San Francisco is projected to be hit with a 40-45% value drop-off, showing this pain is being felt nationwide. There’s no shortage of reasons why this value comes into question, but just like the other causes mentioned, rent is always the largest factor to affect the market.
With a large shift in the market value, occupancy rates, and rent prices of these commercial spaces, it’s easy to see how we’ve been heading towards a commercial real estate foreclosure crisis in Chicago and nationwide. With the threat of equity disappearing for these reasons, we may be seeing banks repossess properties just like in 2008, this time with a large focus on commercial properties.
Looking Forward: The Future of Commercial Real Estate
What goes up must come down, and this commercial real estate foreclosure crisis is no different. However, we may have a few more obstacles on the road before we see a clear path to recovery. Homeowners and property owners may have to dig deep to help foot the bill for a large portion of the recovery efforts.
In Chicago for example, a property tax bill crisis has hit homeowners as a result of the massive vacancy rates across the city. To make up for the lost revenue in taxes from these vacant or foreclosed commercial spaces, Chicago homeowners will have to pay hundreds or even thousands more in property taxes this year. A controversial move as Chicago already has the 2nd highest property taxes in the U.S. As more cities experience a loss in property tax revenue, we will likely see more efforts like this nationwide.
So when will we finally start to see recovery in the commercial real estate market? The most common prediction is a full recovery no earlier than 2040 nationwide. Others disagree, claiming through the proper incentives and tax proposals we will be able to dig our way out quicker. But one thing is certain, we are heading toward some form of crash and mass foreclosure crisis. While we can’t give advice on individual investments, we do suggest consulting with a commercial real estate advisor to safely navigate this trying time.
If you do find yourself questioning the viability of an investment property, Pearson Realty Group has you covered. Our experienced team of commercial & industrial realtors and advisors can help you find the safest place to invest and help maximize the return on your investments. Feel free to reach out to us anytime to get started!