The Truth Behind Office Foreclosures: Exploring the Reality of Property Handovers
In this series, we delve into the facts behind negative headlines surrounding the office sector. Previous articles have covered topics such as “Unraveling the Office ‘Doom Loop'” and “Digging into Office Debt Maturities.”
Foreclosure is a difficult process for both lenders and borrowers. It involves a lender taking control of a property when a borrower fails to meet their repayment obligations. With court assistance, the lender then takes over ownership of the asset and may either continue operating it or attempt to sell it in order to recoup losses.
During The Great Financial Crisis, banks found themselves with large amounts of residential and commercial real estate on their hands due to borrowers being unable to pay mortgages. Now, reports suggest that office owners who are struggling with debt are once again handing over their buildings to lenders through deeds in lieu of foreclosure.
According CoStar data from Q2 2023 , 43% percent of all deed-in-lieu foreclosures were for office buildings compared with an average rate of 20% throughout 2022.
Experts say that while many office building owners are facing challenges, they are not simply giving up on their properties without trying other solutions first. Adam Finkel from Tower Capital explains that lenders have been working closely with borrowers during these challenging times by providing more time or flexibility rather than immediately resorting back foreclosing on properties.
Hayim Mizrachi from MDL Group adds that there is much more happening between borrowers and lenders than just assuming another financial crisis where all properties will be returned back banks’ hands.
Eli Randel at CREXi notes how today’s lending institutions understand they aren’t property managers or building operators so they’re willing work together towards finding solutions instead simply going through costly foreclosure processes which can take significant time away from managing assets properly .
Randel also mentions two alternatives methods used by lenders and borrowers to avoid foreclosure: discounted payoffs (where the lender accepts less than what is owed) or loan modifications. He adds that lenders are not typically in the business of managing properties, so they may choose to extend loans rather than taking on losses through immediate disposition.
Adam Showalter from Stream Realty explains how the term “extend and pretend” has been used in past financial crises when lenders would defer costs or risks for a later time. However, he notes that this term does not accurately reflect today’s market where many lenders understand there has been a significant decrease in property values but still want work with borrowers towards finding solutions together.
Tony Russo at Lee & Associates agrees with this sentiment stating we are far from seeing mass foreclosures as office buildings still hold equity despite decreased values. Owners can refinance their properties by adding more equity, accepting higher interest rates or lower distributions which will help them weather current economic conditions.
Furthermore, owners don’t have to face these challenges alone as creative financing options such as joint ventures and new partnerships can bring additional capital into struggling properties according Tony Russo at Lee & Associates .
