Current Trend Sees More Foreclosed Commercial Properties

August 17, 2012 / Elizabeth Buckley, Commercial Property Analyst

It is not only residential property owners who have in the past, or are now facing foreclosure. An increased number of foreclosed commercial properties are expected in the next few years. In 2011, residential foreclosures decreased for the first time since 2005. But, there has been an increase in the first six months of 2012.

Current Trend Sees More Foreclosed Commercial Properties

There are a large number of commercial properties that are considered to be underwater. This is the term for a property that has more owing on the mortgage than the owner would get by selling it on the current market. Foreclosures are expected as a result. One such property is a shopping mall that has foreclosure procedures starting against it. Two others in the same predicament are a drug/hardware store and a retail center.

This is not prominent news since the focus is on foreclosed residential properties. But, attention is being drawn to the possibility that failures on commercial mortgages are looming on the horizon. The situation might result in another crisis in the real estate industry.

According to the Congressional Oversight Panel over a trillion dollars’ worth of commercial mortgages will be due by 2014. Half are under water loans. The resulting losses might cause small to medium sized banks to go under. All banks will be hesitant to approve new mortgages on commercial properties. It will greatly impede the economic recovery.

At this point, rates of vacancies are up and rents are down. As a result, capitalization rates are up. Commercial property owners are in a dilemma. They need to sell but cannot get what is a fair price, enough to cover what they owe the bank. Refinancing possibilities are not available because of the loss in property values.

In July Alpine Bank started foreclosure proceedings against a retail center in Rockford, a building that housed Osco Drugs and Sears Hardware in Loves Park and an airplane hangar located on the property owned by Rockford International Airport.

BMO Harris Bank filed against the Machesney Park Mall. U.S. Bank filed suit on a shopping center in Rockford that is vacant except for Hobby Lobby. Byron Bank will foreclose on a retail strip mall in Loves Park and an office building in Machesney Park. These are but some examples of the trend towards foreclosed commercial property in the commercial branch of the real estate industry.

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