ATTOM Data Solutions recently released a report on commercial real estate highlighting a significant increase in foreclosures from a low of 141 in May 2020 to 635 in January 2024. This is a 97% YoY increase and shows higher rates’ impact on the market.

Source: ATTOM Data Solutions (February 2024)

“California, as a bellwether state, began the decade with 209 foreclosures in January 2014. Though it experienced a decrease in the following months, the foreclosure numbers saw fluctuations reflecting the state’s dynamic economic climate. By January 2024, California had the highest number of commercial foreclosures for the month, at 181. This was a 72 percent increase from last month and a 174 percent increase from last year.”

Dylan Sloan of Fortune (subscription required) reports on comments from industry veteran Fred Cordova, who recently commented that around 30% of office properties are “basically worthless” and will need to be torn down or converted.

That said, Steve Gelsi of MarketWatch reports that Citi Bank analysts believe the stress about commercial real estate is ‘overblown.’ Gelsi notes that major banks have already set aside $39 billion to cover upcoming commercial losses. The analyst notes that although there will be losses, it will be more akin to a cyclical downturn than a crash predicted by some experts.

Similarly, Jessica Kuruthukulangara of Seeking Alpha notes that Jamie Dimon, CEO of JPMorgan Chase, stated recently that commercial real estate losses will be contained if the U.S. continues to avoid a recession. “As for mounting defaults, Dimon said, “part of that’s just a normalization process.” But “if rates go up and we have a recession, there will be real estate problems, and some banks will have a much bigger real estate problem than others.”

Multifamily update

Eric Lynch of the National Association of Home Builders (NAHB) reports that multifamily builder confidence is decreasing. In commenting on NAHB’s Multifamily Market Survey, Lynch notes that: “Financing new multifamily projects continues to be difficult due to tight lending standards and the high cost of development loans.  Given that, along with the historically high level of supply for multifamily units under construction, NAHB forecasts a major pullback in multifamily starts for 2024.”

Source: NAHB (February 2024)

Although overall multifamily supply will continue to be high, there is a gap in what is referred to as ‘missing middle’ multifamily, according to LBM Journal. 

“For the fourth quarter of 2023, there were just 4,000 2- to 4-unit housing unit construction starts. This is flat from a year prior. As a share of all multifamily production, 2- to 4-unit development was just above 4% of the total for the fourth quarter. In contrast, from 2000 to 2010, such home construction made up a little less than 11% of total multifamily construction. Construction of the missing middle has clearly lagged during the post-Great Recession period and will continue to do so without zoning reform focused on light-touch density.”

Further, Robert Dietz of NAHB reports on built-to-rent multifamily, whose supply took a small dip in Q4 2023. In Q4 2023, 102,000 multifamily residences started construction, with 98,000 being built for rent. Rental units made up 96% of multifamily construction starts due to the smaller condo market share still being held back by high-interest rates.

Source: NAHB (February 2024)

Housing activity up

Housing activity is increasing as we enter a spring market according to Fannie Mae. Existing home sales rose 3.1% in January to a seasonally adjusted annualized rate of 4 million. This was the most significant one-month increase in 11 months and the most robust sales pace seen since last August. 

“The gain in existing home sales was in line with our expectations given the decline in mortgage rates in November and December (when most of these sales would have gone under contract) and a pickup in mortgage applications. While we continue to expect a gradual recovery in existing home sales over the course of 2024, we note some downside risk to this forecast as mortgage rates have ticked back up to 6.9 percent, as of the latest Freddie Mac survey, causing mortgage applications to pull back.”

Danielle Hale of Realtor.com reports on the increase in sales activity, highlighting that pending home sales saw a significant increase in December, growing over the prior year for the first time since May 2021. However, pending and existing home sales remain historically low due to high costs from high prices and mortgage rates. 2023 saw the lowest total home sales tally in almost 30 years.

Source: Realtor.com (February 2024)

Dana Anderson of Redfin reports on similar data, noting that new home listings increased by 10% YoY in the four weeks ending Feb 18th, with sale prices up by 6% YoY. This is the most significant jump in nine months. 

Source: Redfin (February 2024)

However, according to Anderson, buyers remain hesitant, with a 10% drop in mortgage purchase applications and a 7% decline in pending home sales YoY. Daily average mortgage rates have crossed 7%, the first time since mid-December.

Finally, Orphe Divounguy of Zillow reports on the uptick in housing activity, commenting that “easing mortgage rates at the end of the year brought buyers – and some sellers – back into the market. The flow of existing homes onto the for-sale market has continued to improve year-over-year. Zillow data shows new listings are now up 6%, while the number of homes for sale has increased by 3% compared to a year ago. The housing market was supply constrained in 2023, and the increase in supply bodes well for potential home buyers and housing sales this spring.”