Commercial Real Estate hurting

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The Clearest Sign Yet That Commercial Real Estate Is in Trouble

Lenders are issuing a record number of foreclosure notices related to risky property loans



Foreclosures are surging in an opaque and risky corner of commercial real-estate finance, offering one of the starkest signs yet that turmoil in the property market is worsening.


Lenders this year have issued a record number of foreclosure notices for high-risk property loans, according to a Wall Street Journal analysis. Many of these loans are similar to second mortgages and commonly known as mezzanine loans.


Mezzanine loans have high interest rates and offer a faster and easier path to foreclose than mortgages. The Journal analysis found notices for 62 mezzanine loans and other high-risk loans this year through October. That is more than double the number for all of last year, and likely the highest total ever for a single year, as higher interest rates and rising vacancies punish the property sector. 


The increase in mezzanine-loan foreclosure announcements—while not large in absolute numbers—matters because it offers a more immediate measure of commercial real-estate distress than mortgage foreclosure rates. 


The number of commercial mortgage foreclosures tracked by data companies is still low. It can take many months or even years between default and a traditional mortgage foreclosure, as cases inch through courts. Banks are also often reluctant to take over buildings. 


In contrast, foreclosing on mezzanine loans is often quick and easy because they aren’t technically mortgages. Because the loans don’t appear in property records, the Journal was unable to determine the dollar value of the announced foreclosures.


These loans took off in the decade following the 2008-09 financial crisis as regulators cracked down on big banks and they became more conservative lenders. Many property owners made up the financing shortfall by borrowing from smaller banks, or by taking out these second loans from debt funds and other nonbank lenders, often on top of bank mortgages. 

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