Commercial Foreclosures 2012 Update

Written by Chris Norwood, NAI Norwood Group

In November of 2011, there was a four year dip in the total number of foreclosures in the US. In January of this year, real estate research firm Realty Trac forecasted that 2012 would be a big year for foreclosures across the nation. They cited fourth quarter 2011 process delays as well as the “robo signing” scandal of possible reasons why properties that should have been foreclosed on in 2011, would be closed in this year. Here we are wrapping up 2012 and we must ask: what is taking place with foreclosures and what is going on in commercial foreclosures?

Let us begin with the New Hampshire macro foreclosure market. Do you remember those days, when no one worried about that word. In 2004, the foreclosure rate (Total number of foreclosure deed transfers divided by total transfers), was at a 17 year low. Less than one percent of all deed transfers in the state were through a foreclosure. Foreclosures continued to rise breaking the 10% barrier in 2008 and peaking in 2010 at over 16%. That is one out of every six real estate transfers. A large number.

Since that time foreclosure rates have been flat. 2011 clocked in just under 16% and 2012 looks to be about the same forecasted from the first 10 months of the year. In New Hampshire we have seen home sales begin to climb. In September of this year the New Hampshire Association of Realtors announced that they had seen eight double digit straight months of home sale increase month over month. In addition median home prices were leveling. So while foreclosures continue to remain in the forefront of real estate discussions, they are not increasing here in the Granite State.

On the commercial front, experts from across the nation are viewing things differently. While there are currently billions of dollars of outstanding debt across the nation that may be considered “troubled” we need to place that in context. In a residential foreclosure process, when a homeowner falls behind on payments, the long process has begun a foreclosure. Along the way there are many options to avoid that pitfall such as short sales. In the end when a short sale or foreclosure happens the result is the current occupant probably vacates. In the commercial process much of the troubled debt in the market is underwritten on projects that are leased as investment properties to other tenants. This is important because the underlying asset still may have cash flow and may have value. As a result commercial property tends to be less likely to foreclose as it is to have the note sold or to have another investor come and pick it up.

This is not to say that commercial foreclosures cannot happen.  Historically, commercial real estate trends 12-24 months behind residential. In 2008 all foreclosures in the state were around 14% but commercial properties were being foreclosed less than 9%. The following year, commercial was back on par with the rest of properties at 14%, a 12 month lag.  However, in New Hampshire we have then bucked that tend. Since 2010 the commercial foreclosure rate has been falling and this year it is projected to end somewhere back around that 9%, despite the statewide rate being around 16%.

Forecasting from here is not easy; however the decrease in foreclosures in commercial property is probably more attributed to the improved job numbers and the fact that the health of New Hampshire is strong. Large properties with syndicated debt still may be in trouble, but local lenders are doing what they can to work with property owners who are in trouble.  While there are outside factors such as the “Fiscal Cliff” that loops for our federal delegation, the local prospect seems positive.  We see a marginal lowering of the foreclosure rate for all property in New Hampshire for next year.