The zombie office timebomb: Commercial real estate foreclosures jumped 117% in March – as experts warn it could trigger the next banking crisis

Commercial real estate foreclosures are ramping up across the US as soaring interest rates and the slow return of workers to office spaces begin to take their toll. 

There were 625 commercial real estate foreclosures in March – up 6 percent on the month prior and 117 percent from the same time in 2023, according to latest figures from real estate data provider ATTOM. 

Some areas are facing a bigger crisis than others – with 187 properties facing a foreclosure filing in California last month, which was the highest of any state. Although this was an 8 percent dip from the previous month, it was a huge 405 percent jump from last year. 

Small and regional banks are the biggest source of credit for the commercial real estate market, holding about 80 percent of the sector’s outstanding debt. 

Around $929 billion in commercial real estate loans is due to mature this year, according to the Mortgage Bankers Association, raising concerns this trouble spot could trigger a banking crisis.

Commercial real estate foreclosures are ramping up across the US as soaring interest rates and the slow return of workers to office spaces begin to take their toll

Economists last month found 40 percent of office loans on bank balance sheets were underwater – owing more than the property is worth.

Smaller regional banks who loaned the money to buy them could themselves be at risk if the loans default as they are not big enough to handle the losses.

Foreclosure occurs when an owner can no longer make their monthly mortgage payments and has to forfeit the rights to a property as a result.

To calculate the data, ATTOM counts the number of commercial properties with at least one foreclosure filing, which includes default notices, scheduled auctions and bank repossessions.   

California, which was at the epicenter of the regional banking crisis last year with the collapse of Silicon Valley Bank, is at the forefront of the commercial property crisis.

According to Bloomberg, almost a third of the state’s 127 registered banks have property debt above the 300 percent level – the most among US states.

With interest rates sky-high, banks are setting aside more money to cover potential commercial real estate losses. 

San Francisco and Los Angeles, in particular, have been hit hard by companies abandoning office space amid a rise in remote work and a slow return of staffers after the pandemic.  

‘The financial ecosystem in California is heavily reliant on regional and commercial banks,’ Michael Imerman, faculty director of the master of finance program at the University of California, told the outlet. 

‘Small banks cater to a specific clientele and that can lead to an age-old problem: concentration risk.’

A rise in foreclosure filings shows banks are getting tougher on delinquent borrowers, Bloomberg reported.  

Alongside California, New York, Florida, Texas and New Jersey also saw an increase in commercial foreclosures increase last month, according to the data. 

San Francisco and Los Angeles, in particular, have been hit hard by companies abandoning office space amid a rise in remote work and a slow return of staffers after the pandemic (Pictured: San Francisco skyline)

Alongside California, New York, Florida, Texas and New Jersey also saw an increase in commercial foreclosures increase last month, according to the data

New York had a total of 61 commercial foreclosures in March 2024, a 5 percent increase from the month before and a 65 percent increase from a year ago.

Florida saw a 30 percent increase from the month prior and a 107 percent increase from last year, while Texas saw a 31 percent hike from February and a 129 percent increase from the same time in 2023. 

In New Jersey, there was a 31 percent jump from the month before, and a 133 percent increase from March 2023. 

Foreclosures have been on the rise since a low of 141 in May 2020 – increasing by more than four times since then to the current rate, or 117 percent year-over-year.

In May 2020, the US was at the peak of the Covid-19 pandemic, and many lenders were offering financial aid or options to temporarily suspend payments to help borrowers make ends meet. 

Federal Reserve Chairman Jerome Powell said last month that issues with commercial real estate will likely lead to some bank failures

But since then, interest rates have skyrocketed, and the demand for office space has plummeted as more staffers work from home. 

In a bid to curb raging inflation, the Federal Reserve has raised interest rates to a 23-year high. And a hotter-than-expected inflation report last week has poured cold water on hopes for a rate cut in the coming months. 

Fed Chairman Jerome Powell said last month that issues with commercial real estate will likely lead to some bank failures – but do not pose a larger threat to the financial system as a whole, Fox Business reported. 

‘We have identified the banks that have high commercial real estate concentrations, particularly office and retail and other ones that have been affected a lot,’ Powell said while testifying on Capitol Hill. 

‘This is a problem that we’ll be working on for years more, I’m sure. There will be bank failures, but not the big banks.’