Commercial property lenders have seen a surge in foreclosure notices this year, reaching record numbers according to an analysis by the Wall Street Journal. The study found that there were 62 mezzanine loans and other high-risk loans issued through October, more than double the rate from last year and potentially the highest ever for a single year. While the exact value of these foreclosures is unknown due to their absence in property records, they provide a more immediate measure of distress in commercial real estate compared to mortgage foreclosure rates.
The increase in mezzanine loan foreclosures can be attributed to stricter regulations on big banks following the Great Recession, leading them towards becoming more conservative lenders. This created opportunities for companies like Blackstone, KKR, Starwood Capital and South Korean asset managers who collectively lent billions through mezz debt with yields often exceeding 10%. Additionally, finance companies utilized funds from thousands of potential immigrants through programs like EB-5 to create pools of mezz loans for developers.
This influx of debt allowed investors to drive up prices while investing little money themselves which ultimately inflated CRE market values leading up until now. As real estate prices begin falling and many borrowers default on their loans due inability or unwillingness to continue funding assets they cannot hold any longer; lenders are taking back properties quickly as these types of debts do not require lengthy processes like traditional mortgages.
Terri Adler managing partner at law firm Adler & Stachenfeld stated “A lot borrowers have basically said ‘I can’t hold this asset any longer’…and [lenders] have said ‘OK we’ll take it back'”. One example being Margaritaville Resort located at Times Square whose developer defaulted on $57 million worth if Mezzanine Loans earlier this March.
