The Shadow Effect via CCIM Institute

A backlog of unforeclosed properties haunts today’s market.
by Rowan Sbaiti and Robert Grunnah, CCIM

One of the mysteries of today’s commercial real estate market is the current dearth of foreclosed properties on the market. After the credit meltdown of 2007–2008, industry professionals expected foreclosed properties to flood the market, but few ever did. Today, brokers and investors alike question why more foreclosures are not occurring. The economic climate is not that much better: Unemployment is almost in double digits, discretionary spending is almost zero, and banks are failing across the country. Many more institutions are conspicuously on life support.

Even solvent companies have downsized, giving space back to the market. Rising vacancies in most market segments across the nation are putting downward pressure on rents, squeezing property owners who are unable to cover their debt service. Owners should be in default and banks should be foreclosing.

At least that was the traditional process. Obviously other factors are at play in this “new normal” commercial real estate market. Determining what is happening with defaulted properties and how it is affecting the real estate market in general may give some insight into the opportunities that will be available in the next 18 to 24 months. This article attempts to define the shadow inventory that exists through broad analysis as applied to commercial mortgage-backed securities statistics.

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