There is a big warning sign that commercial real estate is in trouble

Commercial real estate is facing an unusually high number of foreclosures on subprime loans, an indicator that the sector could face even more foreclosures in the future, according to The Wall Street Journal.

Lenders issued foreclosure notices on 62 subprime loans in the commercial real estate sector for the year that ended in October, double last year’s total and possibly the highest number ever . seconds to a WSJ analysis. Many of these foreclosures are mezzanine loans, or high-risk real estate loans that allow a shorter time for foreclosure and have higher interest rates, with a shorter time period that gives more pulse immediate to the health of the sector and predicts a possible wave. of foreclosures in the future on more traditional loans.

“A lot of borrowers have basically said, ‘I can’t hold this asset anymore; I can’t keep investing money,’” Terri Adler, managing partner of the law firm Adler & Stachenfeld, told the WSJ. “And the lenders have said, ‘OK, we’ll take it back.'”

Commercial foreclosures, while still low, are a lagging indicator of the health of the industry, as there can be a gap of several months to years between a default and a foreclosure on more traditional loans, according to the WSJ. The total dollar amount of mezzanine loan foreclosures, despite the increase, is not known because the loan type does not appear in property records due to its opaque nature.

“Non-performing commercial real estate loans at U.S. banks have hit their highest level in a decade as higher interest rates, an uncertain economy and increased pressure from the remote work pile on building owners”. https://t.co/DXNOUAOJU3 pic.twitter.com/YtpawnQLQl

— Jesse Felder (@jessefelder) November 9, 2023

Regulators have forced the biggest banks to be more cautious since the 2008 financial crisis, when a housing bubble burst after banks issued an exceptional number of risky loans, leading to the recent surge of mezzanine loans, which prevent this regulation fill that. demand for riskier loans, according to the WSJ. Smaller banks, debt funds or non-bank lenders fill this gap with mezzanine loans that attract lenders with interest rates often above 10%.

Mortgage rates achieved a recent peak in late October at 7.9%, the highest point since September 2000. Residential home affordability has also suffered, with the average American only able to afford a 30-year mortgage in a $356,273 home instead of the same family. being able to afford a $737,392 home in December 2020.

Interest rates on all forms of debt face upward pressure from the Federal Reserve’s federal funds rate hikes. The rate has been to put in a range of 5.25% and 5.50%, highs in 22 years, after a series of 11 hikes in an effort to combat inflation, which peaked at 9.1% in June 2022.

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