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. 

Where Are All of the Commercial Foreclosures?

In a sea of bad news, locally and nationally, we would intuitively think that there is a multitude of bad commercial properties coming on line in the foreclosure arena. Passive investors and users alike should be well suited to sit and wait until that building or dirt comes on the block and they can grab it up. However the data illustrates a different picture for The Granite State.

From the beginning of the first quarter of 2010 through the end of the third quarter of 2011, there were 2255 property transfers each month* in the state. In any given month only 100 of these were labeled commercial (about 4.5%), while the balances were residential or unclassified. Commercial property transfers in the state, as the numbers show, are a small portion of the total number of deed transfers. It should be noted however that there are a large number of unclassified deed transfers, about 8%, which can skew the data.

 Back to the alleged tidal wave of commercial foreclosures that are coming on line. On average there are about 100 commercial property transfers each month, of these about 12% are foreclosure transfers. Keep in mind this is statewide and for all property types such as free standing, condominium and land. As a point of reference residential home, condo and land foreclosures, over that same period was 15%. While these numbers may sound high, keep in mind that in the last real estate recession in the nineties, our rate was up close to 20%.

Commercial foreclosure transfers in the state are far lower than the perception of what they should be and slightly less than the residential homes that are being foreclosed upon. What types of properties are getting foreclosed upon?

 Of 10 Commercial Property Foreclosures…

…1 is a piece of raw land

…1 is a commercial condo

…2 are multifamily property five units or above

…6 are commercial land and building

Beyond the numbers we are not seeing these foreclosure sales affecting the overall market in terms of huge discounts to value. Are prices depressed off their highs a few years ago? Yes. Are they taking the steep discounts that residential homes have taken? Surely not. The reason is that there is still demand and even when these commercial properties are purchased at foreclosure they are being resold, released or utilized. The next time the national press discusses the decline in value of commercial property, remember that The Granite State is fairing well.  

*Deed transfers, warranty, quitclaim and foreclosure deed transfers.