US Real Estate Asset Seizures Reach Largest Scale in 9 Years

Default blame... Some talk of bottoming out
Hope for benchmark interest rate cut expected in September
However, industry difficulties to persist for considerable time

The scale of real estate asset foreclosures has risen to the highest level in nine years due to the continued downturn in the U.S. commercial real estate market. This is interpreted as a sign that the commercial real estate market is approaching bottom, but pessimism is also emerging that the recession will persist for a considerable period.

On the 29th (local time), The Wall Street Journal (WSJ), citing market information provider Morgan Stanley Capital International (MSCI), reported that the volume of foreclosed office buildings, apartments, and other commercial real estate in the U.S. during the second quarter (April to June) reached $20.55 billion (about 28.4 trillion KRW), a 13% increase compared to the first quarter. This is the largest scale in about nine years since the third quarter of 2015 ($27.5 billion).

The commercial real estate market has been in decline due to the normalization of remote work after COVID-19 and prolonged high interest rates. Building owners who borrowed money at low fixed interest rates in the past have faced difficulties as their loan maturities approach, forcing them to borrow at much higher interest rates, leading to defaults. This has resulted in an increase in foreclosures of distressed real estate.

The industry is currently waiting for the Federal Reserve (Fed) to lower its benchmark interest rate. Since inflation has been somewhat controlled, a rate cut is expected in September.

However, pessimism is spreading that the rate cut will not be able to restore the lost value of commercial real estate. This is because commercial real estate prices have plummeted too much. For example, in Washington D.C., many buildings have recently been sold at bargain prices. Insurance company State Farm recently foreclosed an office building near the White House and sold it for $17.6 million (about 2.43 billion KRW). This is about a 70% discount compared to the price the building owner paid in 2010.

However, there is also an interpretation that the increase in commercial real estate foreclosures signals that the sluggish market is approaching bottom. WSJ explained, "When lenders foreclose on real estate, they usually sell it quickly, which helps determine real estate values in a market that has experienced a prolonged downturn."

Even so, the pain felt by the commercial real estate industry may be prolonged. WSJ pointed out, "If the U.S. economy enters a recession and layoffs increase, reducing demand for office space further, commercial real estate values could decline even more."

Regulators are also on high alert for the potential impact of the commercial real estate market downturn on the financial system. According to market information firm Trepp, the total amount of commercial real estate-related loans maturing from this year through 2027 is $2.2 trillion (about 3,000 trillion KRW).

The increase in delinquency rates on U.S. commercial real estate loans also suggests that foreclosed assets may increase further in the future. According to Trepp, the delinquency rate on commercial mortgage-backed securities (CMBS) backed by commercial real estate loans rose to 8.11% this month, the highest level in about 11 years since November 2013 (8.58%).

Since the commercial real estate market is unlikely to recover to pre-pandemic levels and interest rates are much higher than during the past 'zero (0) interest rate' period, real estate developers are increasingly liquidating assets and exiting businesses, unlike in the past. Nicholas Zeidenberg, Managing Director at Eastdil Secured, a real estate investment bank, said, "In this (downturn) cycle, many investors believe that the value of office buildings is in trouble."