The number of foreclosed commercial real estate properties in the United States rose in December 2024, according to a recent report from real estate analytics company ATTOM, which highlighted the underlying pressure facing the sector.
State-wise, California saw the highest number of commercial foreclosures at 257. New York followed with 73, Florida 67, Texas 58, and New Jersey rounded up the top five with 51.
The sustained increase in numbers “points to growing financial strain in the commercial sector, influenced by interest rates, shifting property demand, and broader economic pressures,” according to the report.
In the decade between 2014 and 2024, foreclosure activity was highest in the early years, hitting a peak of 1,626 foreclosures in October 2014, the report said.
Over the next several years, there was a steady decline, hitting a low point of 378 foreclosures in April 2020. The activity saw a resurgence in mid-2021, with last year registering an upward trend.
The council highlighted the continued rise in vacancies, slower rent growth, and increased borrowing costs plaguing the sector. These factors have resulted in higher loan losses, delinquencies, and provision expenses for banking institutions, the report said.
Office properties were cited as the “most concerning subsector.” Vacancy rates among office properties have hit their highest level in a decade, the council said, attributing the situation to “structural changes in office use related to remote work.”
“Office properties in large urban metro areas are experiencing the most stress, suggesting the larger financial institutions likely to hold these loans may face particularly elevated risk,” the report said.
Market Risks, Positive Outlook for 2025
According to a September 2024 analysis from the U.S. Government Accountability Office (GAO), credit risks in commercial real estate have increased since 2018.The market has been strained by rising interest rates, a pandemic-related jump in remote and hybrid work, and a dip in prices, especially for office properties. Between August 2022 and December 2023, commercial real estate (CRE) prices fell 11 percent, it said.
These factors contributed to making the repayment of commercial real estate loans difficult for borrowers, leading to losses for the banks. Between July 2022 and December 2023, the delinquency rate for such loans generally increased, the GAO said.
“Banking regulators and credit rating agencies have expressed concerns about the potential impact of the CRE market on the financial system. They have noted weaknesses in risk management practices at some large banks and an increase in rating downgrades for community and regional banks,” the GAO said.
“Although banking regulators have stated that risks to financial stability appear to be manageable for most banks, economic weakness and CRE concentration could amplify financial system risks.”
The industrial segment remains the sector choice as demand for warehouses and other industrial properties is being driven by e-commerce and logistics requirements.
In the office space, vacancy rates are beginning to moderate, according to JP Morgan’s note. Meanwhile, retail commercial real estate demand continues to perform well, with demand coming in from grocery-anchored neighborhood shopping centers in populated suburban and urban locations.
“The industry is poised to be in a better place compared to the last few years,” said Victor Calanog, global head of research and strategy and real estate private markets at Manulife Investment Management.
“It appears that the landing will be relatively soft, so that should mean continued positive momentum for economic activity, benefiting leasing and income drivers, including rents and occupancies.”
