Foreclosures Might Not Be the Best Metric for Spotting the Bottom

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Foreclosures might not be the best indicator of the bottom in the commercial real estate market, as other metrics may provide better insights. Also, some building owners are considering drastic alternatives to traditional property insurance amid record-setting rate increases. This week, don’t miss our Propmodo Technology focus on Facilities Management, supported by our friends at R-Zero. And, be sure to join us today at 1:00 PM ET for a Propmodo Live webinar where we will explore the latest office occupancy trends.

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Foreclosures Might Not Be the Best Metric for Spotting the Bottom

We are starting to hear fewer predictions of an impending doomsday in commercial real estate. Now, these have been replaced with questions about whether or not we have reached the bottom. An article in the Wall Street Journal suggests that the recent surge in commercial foreclosures could be a sign that the bottom is near.

Foreclosures are an important data point; they can indicate how many borrowers are unable to refinance their properties. But, a rise in foreclosures might tell us more about lenders than it does about borrowers. So far, both lenders and borrowers have been keen to find ways to keep buildings out of foreclosure. This has included extending current loans, finding new terms that both parties can agree on, or bringing in new lending or equity partners. But now, lenders are choosing to let their loans go into foreclosure. Many of these lenders are regional banks looking to clean up their books as investors worry about their financial health.

A better way to track the valuation of the underlying real estate of these commercial real estate loans is by monitoring the commercial mortgage payoff rate. This rate dropped to a historically low 35 percent in Q1 of this year. Now, that rate is expected to increase to a healthy 50-55 percent for the rest of the year. Another useful metric is the delinquency rate, which has also been on the downswing in the last quarter.

We may well be approaching the bottom, but a better way to spot the upcoming turnaround is not by watching whether banks want to keep delinquent loans on their books. Instead, it is by observing how many borrowers are still willing to make payments on their devalued buildings. The willingness of borrowers to continue making payments, despite the decreased value of their properties, could be a more telling sign of an impending recovery in the commercial real estate market. As these trends develop, they will provide more clarity on the state of the market and the potential for a turnaround.

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Rising costs are challenging the commercial real estate market, driven by higher borrowing expenses and skyrocketing property insurance rates due to extreme weather. With traditional insurance becoming increasingly unaffordable, some property owners are exploring alternative strategies, including self-insurance, despite its risks.

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What to Watch

Last chance: Join us today at 1:00 PM ET for a Propmodo Live webinar where we will explore the latest office occupancy trends reshaping workplace performance and utilization. We'll delve into shifting demand patterns, highlight success stories from various sectors, and discuss the effects of hybrid work models on occupancy and operational strategies.

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