So I’m sure many of you have heard that the next wave of foreclosures is going to include a massive amount of commercial property. According to the research firm Real Capital Analytics, during the first five months of 2010, lenders have taken back $10 billion of commercial real estate via foreclosure or settlement. However, during that same period, they have only sold $2.6 billion of commercial REOs. Real Capital Analytics further reveals that the cumulative commercial REO inventory resulting from this recent surge exceeds $28 billion. However, it has become very unclear when these foreclosing institutions plan to liquidate these properties through the REO process.
Commercial Foreclosures
Unlike residential REOs, commercial REOs are closer to businesses than they are to real property both in their high dollar amounts and in the analysis used to determine their value. Banks appear to be more willing to hold on to these commercial properties for longer periods of time waiting for the market to rebound before they offer them as REOs. Many of these distressed commercial properties are still performing well with relatively low vacancies. The reason for these commercial defaults is that the paper or loans behind the properties are beginning to readjust, much like the adjustable rate mortgages in the residential sector. So it appears, that lenders are taking back many commercial properties that still see decent performance with relatively low vacancies. While banks are not in the business of managing real estate, managing a commercial property that is still performing is probably not as a hard of a pill to swallow than managing a vacant residential REO.
However, there are numerous private investors and opportunistic funds waiting in the wings for these commercial properties to fall out the other side of the foreclosure process. There currently is a lot of capital tied up right now in the hopes of acquiring these commercial properties at large foreclosure discounts. What has become unclear is exactly how long these parties will have to wait.
