Beyond South Florida’s seemingly endless parade of construction cranes is a wide array of distressed houses and condominiums.
The region’s real estate market has rebounded since last decade’s recession. But South Florida is still the 14th largest distressed residential market in the U.S., according to industry research firm RealtyTrac. Las Vegas has the most distressed properties in the nation, followed by Lakeland, Florida.
Three years ago, as many as 50 percent of South Florida’s residential transactions involved distressed homes.
By May, that figure dropped to 24 percent, according to Daren Blomquist, vice president of RealtyTrac. That’s far less than the dark days, but still much higher than the rest of the nation. Nationwide, 14 percent of residential sales are considered distressed.
The number of distressed homes in South Florida “is slowly but surely coming down,” Blomquist said.
During the recession, “you had a lot of folks who got into trouble with condos they couldn’t afford,” he said. In addition, “in Florida you have a foreclosure industry that fell into dysfunction because of the volume of foreclosures coming through.”
Florida’s foreclosure courts were so tied up that it sometimes took more than 900 days to close a single case, according to Blomquist. As a result, new distressed properties continue to stream in. In June, 7,880 foreclosed residential properties hit the market. That represented a 24.4 percent year-over-year decline, but a 29 percent increase from May.
“Even though the [economy] is getting better,” he said, “it’s taking a long time to deal with distressed properties that fell into foreclosure two or three years ago.”
The largest share of distressed residential sales in May 2014 occurred in Miami-Dade County, where 32 percent of home sales were real-estate-owned transactions, foreclosure auctions or short sales. By comparison, 24 percent of Broward’s sales involved distressed properties. Palm Beach County’s distressed homes made up 21 percent of real estate sales.
The relatively high number of distressed properties has only added to the buying frenzy in South Florida’s real estate market. “In the past, distressed sales have been a drag on the market,” Blomquist said. “But because there’s such a low supply of properties in South Florida, these distressed sales are actually acting as a stimulant because they are providing more inventory, and they’re getting gobbled up pretty quickly.”
Commercial Rebound
Far less abundant are distressed commercial properties like apartment buildings, warehouses, office complexes, shopping centers and industrial parks. At the same time, more than $8 billion in commercial loans are coming due between now and 2018.
In June 2011, South Florida had a delinquency rate of 13.4 percent for commercial loans, according to Trepp research analyst Joseph McBride. That compared with a 9.4 percent delinquency rate for commercial loans nationwide.
By June, however, the percentage of delinquent commercial properties was lower in most of South Florida than the national average, McBride said. The delinquency rate was 6.6 percent for the U.S., versus 5.6 percent in South Florida.
Jon Chassen, a partner in law firm Bilzin Sumberg’s Real Estate Group and a “White Knight” mediator, said it usually makes business sense for both lenders and borrowers to resolve their issues quickly. “White Knight” transactions involve a third party arranging a settlement between a lender and delinquent borrower and getting the distressed property in the hands of a developer. This approach is being used to resolve foreclosures from the last real estate cycle.
Still, some foreclosure actions get personal and drag on for years. Those lingering cases involve the majority of South Florida’s distressed properties. Most of the loans that are delinquent date back to 2006 and 2007, Chassen said.
McBride credits rising home prices in South Florida for the recovery of the commercial sector. And commercial properties should continue to gain value, as long as home prices continue to rise, interest rates remain low and the economy keeps rebounding.
But if the economy should weaken or if interest rates rise, things might get dicey for the commercial sector. That’s because billions of dollars in outstanding loans are maturing. In 2015, nearly $3 billion in loans in South Florida will come due.
If interest rates rise, it will become more costly to refinance, and banks may be less willing to cooperate with owners of less profitable commercial properties.
“It will just make it harder for owners of marginal properties to access credit,” McBride said.