There is much discussion today about commercial real estate foreclosures. I get a handful of phone calls every week from buyers looking for distressed and foreclosed properties, and rightly so. The residential real estate market is in shambles so the perception is that the commercial real estate market must be in the same condition.
The recent foreclosure of the John Hancock Tower in Boston had significant media attention, both locally and nationally. About three years ago this property was purchased for $1.3 billion by a private equity firm. It was recently sold by the debt holders to a group of investors for $660.5 million. Its no wonnder many experts predict that the commercial foreclosure rate will increase over the next few years. This is partly due to the high number of commercial mortgages that are set to mature during this time and the lack of available capital to refinance these mortgages.
The CMBS (commercial mortgage-backed securities) market will likely experience the the brunt of the foreclosures since there is almost no capital available in this sector. These securities are basically pools of individual commercial mortgages that are packaged together and sold to investors as bonds. The properties vary in size, type and location and are usually top tier investments. Making a foreclosure acquisition of these properties is out of reach for most individual buyers and investors.
Many commercial lenders are extending existing mortgages for one to two years as long as the borrower is making the payments. This can help borrower avoid foreclosure. For instance, say a lender won’t extend an existing mortgage, the borrower will then have to refinance the debt in the current market which is experiencing a ‘credit crunch’. If the borrower can’t obtain new financing due to a decrease in an appraised value, inadequate credit, etc., then the lender may be forced to foreclose.
Whether the commercial real estate market sees a flood of foreclosures is yet to be seen. Mortgage extensions are helping to keep the foreclosure rate down but if payment delinquencies increase so will foreclosures.
