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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 64 July 2024 J O U R N A L Examining Post-Pandemic Totals In "Distressed Office Market Contin- ues to Unfold Amid Stagnating Demand and Falling Property Values" a post by CommercialEdge.com's Evelyn Jozsa, it was noted that the wave of office distress many anticipated has yet to materialize, but recent U.S. office market reports show that many markets are exposed to potential distress. "Everyone has been asking, 'Where is this wave of distress?'" said Peter Kolaczynski, Director, CommercialEdge. "The reality is that it didn't materialize with extensions the last few years, but we are seeing an uptick, and this data shows the threat is still there in many areas." According to the post, nationwide, some 83.7 million square feet of offices were under construction as of April, representing 1.2% of stock. The office under-construction pipeline has shrunk by more than 50% in the past 18 months, as buildings have been completed and starts have slowed to a crawl. In addition, office starts have been nearly nonexistent in 2024, with just 3.2 million square feet of new space breaking ground through the end of April. While office construction began slowing in response to the shifts the pandemic brought to office utilization, some development was still occurring. Topping the Vacancy List The Western U.S. tech markets reported the largest increase in office vacancy rates, according to the report, with San Francisco leading at 25.9%, up 650 basis points year over year—the highest uptick among the top 25 U.S. office markets. Due to the tech sector's poor performance, office employ- ment in the city has fallen 4.9% compared to last year. The information technology (IT) sector alone lost 13,000 workers in the past 12 months, representing a 10.5% drop, according to the Bureau of Labor Statistics (BLS). The BLS found that total nonfarm payroll employment increased by 175,000 in April 2024, and the unemployment rate changed little at 3.9%, with job gains report- ed in the healthcare, social assistance, and transportation and warehousing sectors. As 2024 continues, the office sector may continue to encounter several challenges, including reduced demand to continued high interest rates. Notably, office sales nationwide have been driven by institutions selling high-quality assets to balance their portfolios, reduce their office exposure, and mitigate risk on their balance sheets. Nonetheless, the market is evolving to include owners who are selling because they are facing distress and upcoming loan maturities. FORECLOSURE STARTS TICK UPWARD A TTOM's May 2024 Foreclosure Market Report found that there was a total of 32,621 U.S. properties with foreclosure filings during the month— default notices, scheduled auctions, or bank repossessions—up 3% from April 2024, but down 7% from a year ago. "May's foreclosure activity highlights nuanced shifts in the housing market," said Rob Barber, CEO of ATTOM. "While we observed a slight increase in fore- closure starts, the decline in completed foreclosures indicates resilience in certain areas. Monitoring these evolving patterns remains crucial to understanding the full impact on the real estate sector." Increases in delinquencies and defaults are generally tied to the state of the nation's employment situation, and as the Bureau of Labor Statistics (BLS) reported for May, total nonfarm payroll employment increased by 272,000 in May, and the unemployment rate changed little at 4%. Employment continued to trend up in several industries, led by healthcare; government; leisure and hospitality; and professional, scientific, and technical ser- vices. Both the unemployment rate, at 4%, and the number of unemployed people, at 6.6 million, changed little in May. A year ago, the jobless rate stood at 3.7%, and the number of unemployed nationwide was 6.1 million. Regional-Level Highlights Nationwide, one in every 4,320 housing units had a foreclosure filing in May 2024. States reporting the highest foreclosure rates were: » New Jersey (one in every 1,939 housing units with a foreclosure filing); » Illinois (one in every 2,362 housing units); » Delaware (one in every 2,595 housing units); » Connecticut (one in every 2,600 hous- ing units); and » Florida (one in every 2,638 housing units). "Everyone has been asking, 'Where is this wave of distress?' The reality is that it didn't materialize with extensions the last few years, but we are seeing an uptick, and this data shows the threat is still there in many areas." —Peter Kolaczynski, Director, CommercialEdge