Commercial Real Estate in Crisis
With economic and political turmoil, rate cuts, rising unemployment, and global conflict, one pillar of the economy is quietly slipping into deep trouble: real estate. Commercial real estate (CRE) is experiencing some of the highest delinquency and foreclosure rates since the 2008 financial crisis. The collapse of commercial real estate threatens to ripple through the financial system, impacting everything from loan availability to retirement portfolios.
Price Declines and Demand Shifts
CRE prices are plummeting. U.S. commercial real estate prices experienced a 9% year-over-year drop in the first quarter of 2024. Office buildings, especially older or lower-grade properties, have been hit hardest. Some in major cities like New York and San Francisco have lost up to 70% of their value. The loss is largely due incredibly high vacancy rates. Many owners are being left unable to cover loan payments, much less achieve positive returns.1
Much of this downturn stems from a shift in demand since the pandemic. Many companies have reduced their physical office space in favor of hybrid or remote work models. As a result, there is a glut of unused office space. Particularly in less desirable buildings. As debt matures in this overbuilt sector, CRE experts warn of an impending wave of forced sales and defaults.
Surging Foreclosures and Delinquency Rates
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Delinquency rates for commercial mortgages are on the rise. According to the Mortgage Bankers Association, loans that were 60 to 90 days overdue increased in the third quarter. Those over 90 days delinquent also climbed. This rise reflects the financial pressure caused by lower rental incomes and high operating costs.
It follows that commercial real estate foreclosures have also risen sharply. They jumped by nearly 50% year-over-year in September 2024. Nationally, there were 695 commercial property foreclosures in September. That is a 15% increase from the prior month. California has been hit hardest. It has a staggering 238% increase in foreclosures from the same time last year. Other states are also feeling the strain. Year-over-year foreclosure rates rose 49% in Florida and 48% in New York.3
The Flawed Hope of Interest Rate Cuts
The industry mantra, “Survive till 2025,” has gained traction as CRE players anticipate continued rate cuts. They are hoping aggressive interest rate cuts from the Federal Reserve will ease some financial burden. However, even with the recent 50 basis-point cut, this relief may be short-lived. Fixed-rate mortgages remain elevated. Owners face obstacles to refinancing. Buildings are worth less now due to high vacancy rates, waning demand, and growing operating costs. In addition, stricter bank standards can make refinancing at lower rates more difficult. Consequently, many properties may remain financially unviable. Loans for outdated towers with high maintenance costs and limited appeal may be trapped underwater indefinitely.
Banking Risks
The impact of CRE’s downturn extends beyond landlords to financial markets. U.S. banks are currently carrying an estimated $750 billion in unrealized losses tied to real estate debt. That is about seven times the exposure seen during the 2008 crisis. Stress tests designed to prevent another banking crisis now reveal massive systemic risks. The risk stems from holding vast amounts of commercial real estate debt. If foreclosures and delinquencies continue to escalate, banks may be forced to write down significant portions of their portfolios. Destabilizing the financial system in the process.4
The collapse of CRE is also roiling the bond market. With a AAA rating, CRE bonds were once held in higher esteem then Treasuries.
“The AAA rating is designed to be a debt security that would typically default less than once every 5,000 years,” said John Griffin, a chaired professor of finance at the University of Texas in Austin. “Yet, here we are not far from the financial crisis observing defaults,” he said, adding that “it does not appear that the major issues in structured finance have been fixed.”5
Investor confidence has been shaken. Bonds tied to once-premium office buildings, like those for 1407 Broadway in New York, now trade at distressed levels. The bond for the Peachtree Center in Atlanta is down to 55 cents on the dollar. The once-unthinkable risk of AAA-rated CRE bonds defaulting has become a reality in today’s volatile market.
Conclusion
The assumption that real estate would always remain a reliable asset class has been upended by fundamental shifts in workplace and consumer behavior. The CRE industry is staring down $1.7 trillion of mortgages that will mature by the end of 2026 – with no clear path to repayment.6 Failing properties can lead to failing banks, and, ultimately, to systemic financial failure. No one will escape unscathed by such a collapse. Now is the time to learn how to protect the value of your portfolio with physical precious metals. A Gold IRA can safeguard the value of your funds for the duration of the CRE crisis. Contact us today at 800-462-0071 to learn more.
