Commercial foreclosures remain low in Detroit, but will that last?
The pandemic has not caused commercial landlords to lose their properties to foreclosure en masse like they did during the Great Recession.
At least not yet.
In spite of concerns about tenant rent payment early in the pandemic — including from restaurants, bars, gyms, apartment renters, office users and others — as government restrictions to stop the COVID-19 spread were implemented, nearly two years into the public health crisis there have been an average of only 2.4 commercial property foreclosure filings per month since March 2020 when the first cases of the coronavirus were reported in Michigan. That’s according to historical data dating back to August 2005 provided by Irvine, Calif.-based ATTOM Data Solutions.
During that 16 1/2-year window, the Detroit Metropolitan Statistical Area averaged about 27 commercial foreclosures per month, skewed substantially upward as the region was ravaged by economic woes.
Foreclosure filings were in the single digits in August 2005 and remained at those levels until July 2006, when they surged to 28, and remained at 10 or more per month until October 2014 — more than eight years. There were 250 alone in just February and March 2012 combined.
But in the nearly 24 months since the first Michigan cases, there have been just 51 total.
What the next 24 months have in store, though, will be a byproduct of a lot of factors, including how C-suites decide to use — or in some cases, not use — the space they had prior to the pandemic.
“Office for sure has some headwind that they are going to have to deal with eventually, but that is so closely tied to the decision-makers and what the hell they are going to do with their space,” said Mark Woods, COO of Southfield-based brokerage firm Signature Associates Inc. “It sure feels like you can get an opinion that represents the full spectrum if you read the Wall Street Journal or New York Times and CoStar.”
Crain’s reported earlier this month that the state and region led the nation in the year-over-year increase in combined residential and commercial foreclosure filings, based on data from ATTOM, with 1,013, almost five times the number in the Chicago area, which had 210. Michigan’s filings represented a 622 percent increase year-over-year.
Yet those were almost exclusively residential foreclosures, and the big increases were the result of moratoriums expiring and a backlog becoming unjammed, Rick Sharga, executive vice president of RealtyTrac, an ATTOM company, said at the time.
Jared Friedman, managing director in charge of the Capital Markets, Acquisitions and Institutional Advisory Group for Farmington Hills-based Friedman Real Estate, also said at the time that his company, which handles receiverships all over the country, is seeing very few in Michigan.
“The state of the commercial foreclosure market in Michigan specifically is almost nonexistent,” he said. “All the receiverships we have right now are in Illinois, Wisconsin, Ohio, Texas. Michigan is our quietest state in terms of foreclosure.”
He attributed that to the health of the automotive market and its ripple effects, as well as Michigan landlords in general not being over-leveraged.
“We have probably have 3 million square feet of receiverships we have taken over, and almost none of it is in Michigan,” Friedman said earlier this month.
Not all rosy
In spite of the small number of commercial foreclosures, a couple of prominent properties are going through the process and plenty of others have flirted with foreclosure but still — so far at least — have managed to avoid it.
For instance, the 30-story Jeffersonian Houze apartment tower on the east Detroit riverfront is heading to auction in March after lender Fannie Mae foreclosed on the property as part of an ongoing legal battle with existing ownership that started a year ago. The auction, which was originally scheduled for Feb. 17, has been bumped back to March 17.
And not far away, the James Burgess Book Jr. Mansion at East Jefferson and Burns Street is on the market for $3.5 million after its owner fell behind on a $1.245 million mortgage from Birmingham-based Soaring Pine Capital Real Estate and Debt Fund II. The fund foreclosed on the property and was the highest bidder at a July sheriff’s auction for $937,006.
Some have narrowly skirted foreclosure, like the Westin Book Cadillac Detroit hotel downtown, which avoided it when a joint venture between Chicago-based hotel developer Oxford Capital Group LLC and New York City-based hedge fund Taconic Capital Advisors LP assumed $77 million in delinquent commercial mortgage-backed securities debt owed by previous owner Cleveland-based Ferchill Group. The joint venture plans to spend $16.5 million renovating the tower at 1114 Washington Blvd. and Michigan Avenue.
Fairlane, the 1.4 million-square-foot enclosed mall at 18900 Michigan Ave. built in 1976, is expected to be sold next month to an unknown buyer, according to New York City-based Trepp LLC, which tracks CMBS loans. Fairlane and two other malls secure a $161 million CMBS loan on which Miami Beach, Fla.-based Starwood Capital Group defaulted, prompting a receivership and new management. The current balance is about $120.7 million, according to Trepp data.
Partridge Creek, also owned by Starwood, secures $725 million in CMBS debt along with three other malls. Starwood owes $681.6 million on that loan. It is also in receivership and under new management.
On average between August 2005 and January, the Detroit MSA accounted for 1.16 percent of the national commercial foreclosure filings, according to ATTOM data: 5,157 out of 443,460. On average, Detroit commercial foreclosures account for less than 1 percent of all monthly filings nationwide.
But during the Great Recession, there were months when the region accounted for more than 3 percent of the commercial mortgage foreclosure filings in the U.S.: In May 2007, the Detroit MSA accounted for 3.67 percent, or 73 of the 1,989 filed; in February 2012, it was 3.26 percent, or 133 of the 4,083 filed.
Commercial foreclosures peaked nationwide in July 2010, when there were 5,245, according to ATTOM data, and in general, embarked on a downward trend thereafter. In the two years leading up to the pandemic, the U.S. generally had between 1,100 and 1,600 commercial foreclosures a month.
But in the two years since it started, there have been only two months when there have been more than 1,000: March 2020, when there were 1,442, and June 2020, when there were 1,160.
“I’m probably as surprised as you are that we haven’t seen at least a little more commercial foreclosure activity,” Sharga said in an interview Friday. “But the commercial market since we exited the Great Recession has continued to be remarkably strong. We’ve continued to see sort of a decade-long trend in commercial foreclosure activity getting smaller and smaller across the country.”
Sharga said other types of workouts on commercial debt have been more prominent rather than the lender simply taking the property back. In addition, there is a lot of liquidity in the market and buyers are ready to scoop distressed assets up at below-market value, Sharga said.
“Property values have gone up so much over the last few years and investors will take a look at that as an opportunity to buy below market value with the notion that we’re through the worst of the pandemic and things will only get better from here,” Sharga said.
What is to come?
Perhaps the biggest unanswered question remains the fate of the region’s office market — and the commercial debt that finances it.
With a wave of office leases — generally 10 years — inked in 2012-2015 as the region’s economy improved, those leases expiring in the next couple of years will test the market: Will those tenants, after years of hybrid working or working from home during the pandemic, reduce their footprints? Will the impact of COVID-19 on company work habits have largely dissipated, with firms going back to some semblance of normalcy?
“I don’t believe we’ve seen the final fallout of the pandemic in the office market because of … the long-term leases that are in effect,” Sharga said. “Tenants (are currently) continuing to make those payments, even if they’re not fully utilizing the office space. The other way of looking at that, though, is if there is another two to three years, four to five years on that lease, very likely we will have gone through this cycle and be back to something approaching more normal activity.”
In addition, maturing loans that come due next year through 2026 may be of concern in some asset classes that have been slower to recover, such as hospitality and office space, some experts have said.
Posted By: Crain’s Detroit Business on February 28, 2022. For more information, please click here to read the source article.
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