Commercial Real Estate Vacancy Rates Rise As Foreclosures And Bankruptcy Loom

May 12th, 2010 by Reed Allmand

The U.S. office vacancy rate has reached its highest level in 16 years and many commercial properties may face foreclosure or bankruptcy if occupancy rates don’t increase soon.

The U.S. office vacancy rate rose to 17.2 percent, a level unseen since 1994, as the market lost about 11.6 million net square feet of occupied space during the first quarter, according to the report released on Monday. The U.S. vacancy rate inched up 0.2 percentage points from a quarter earlier and was 2 percent higher than a year ago.

The vacancy rate has increased in 57 of the major metropolitan areas, which doesn’t bode well for lenders who will probably need to foreclose on some commercial properties that have suffered under the weight of low occupancy rates and low rents.  Many commercial real estate owners have combated low occupancy rates by offering rock bottom leasing prices and “sweet” leasing terms with companies.  But such actions have not been without their consequences.  While such low-balling deals have helped to keep some existing renters and attracted a few new ones, it has been to the detriment of the commercial property owner’s profits and in many cases has jeopardized their ability to repay loans associated with their properties.  The end result has been an increase in the number of commercial properties facing foreclosure and in some cases, commercial property owners have faced multiple foreclosure which push them into bankruptcy.  And to add insult to injury, many are unable to secure the financing needed to pull themselves out of foreclosure and are forced to sell off properties that may have otherwise turned a profit if they could only survive the current recession.