📊 Investors Hit Pause in 4Q23 per Burns + CRE Daily Fear and Greed Index. See the full report here.

Mezzanine Loan Foreclosures Spike, Indicating Growing Real Estate Crisis

Plus: Colliers’ latest US Office report reveals that the national office vacancy rate has exceeded the peak seen during the Global Financial Crisis.

Mezzanine Loan Foreclosures Spike, Indicating Growing Real Estate Crisis

Plus: Colliers' latest US Office report reveals that the national office vacancy rate has exceeded the peak seen during the Global Financial Crisis.

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Good morning. The increase in mezzanine loan foreclosures signals growing instability in real estate. Office vacancy rates have exceeded the peak of the Global Financial Crisis. In Silicon Valley, Walmart's online division is taking over a significant sublease space previously held by Meta.

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Market Snapshot

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*Data as of 11/13/2023 market close.


Mezzanine Loan Foreclosures Surge, Signaling a Deepening Crisis in Commercial Real Estate

The Clearest Sign Yet That Commercial Real Estate Is in Trouble


The commercial real estate sector is experiencing significant distress, evidenced by a rising surge in foreclosures, particularly in high-risk mezzanine loans.

Mezzanine loan distress: So far this year, there have been 62 foreclosure notices for mezzanine loans and other high-risk loans, more than double the number for last year. The increase in mezzanine-loan foreclosures provides a real-time indicator of distress in the CRE market compared to the longer process of traditional mortgage foreclosure cases, which can take years to surface.

Trouble in the mezzanine

Filling the gap: Following the 2008-09 financial crisis, mezzanine loans emerged as a key financing option. With big banks becoming more risk-averse due to regulatory pressures, property owners turned to alternative sources like smaller banks and nonbank lenders for these high-interest loans. This trend was further fueled by firms such as Blackstone, KKR, and Starwood Capital, who found the high yields of these loans (often exceeding 10%) particularly lucrative compared to the low returns on long-term government bonds.

When the tide goes out: However, the recent decline in real estate prices has led to a wave of defaults in mezzanine loans, revealing new vulnerabilities in property finance since the 2008-09 crisis. Terri Adler of Adler & Stachenfeld notes that borrowers increasingly cannot maintain their investments, prompting lenders to reclaim properties. The opacity of mezzanine loans, which aren't listed in property records, makes tracking their total volume challenging.

Case in point: The Margaritaville Resort in Times Square, a celebrated 32-story tower with a pool, fell victim to the mezzanine loan crisis. Opening in July 2021, its developer, Sharif El-Gamal, secured a $57 million mezzanine loan on top of a $167 million mortgage when interest rates were low. By March this year, he defaulted due to rising interest rates, tight capital markets, and unoccupied retail space. The property was recently acquired through a foreclosure auction.


Why it matters: The sharp increase in interest rates for mezzanine loans, now often exceeding 15%, has significantly heightened the risk of defaults and foreclosures in the commercial real estate sector. Previously, these loans were more manageable with rates around 10% to 12%. The difficulty in refinancing these high-cost loans upon maturity is leading to a growing number of financial crises, reminiscent of the complex, multi-layered mezzanine loan structures that funded large deals prior to 2008. This trend marks a concerning shift in the landscape of commercial property financing.


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  • Real estate legacy: Mel Sembler, a prominent real estate developer and influential Republican fundraiser, died at 93 after creating over 350 shopping centers and retail projects.

  • CRE in 2024: This year’s CRE market faces a scarcity of capital, time, and resources. But according to experts, there could be a potential recovery in 2024.

  • Private debt prevalence: As interest rates rise, private debt becomes more prevalent as companies refinance, risking a potential Ponzi scheme.

  • From office to industrial: Converting empty suburban offices to in-demand industrial spaces is challenging, as it depends on factors like local zoning and resident opposition.

  • Across the pond: Arcapita Group launches ARC UK Industrial Portfolio, a $100M portfolio of income-generating industrial buildings in the UK.

  • Building success: Flaherty & Collins Properties is developing a $67M mixed-use project in Mishawaka, IN, aiming to attract new residents and businesses.

  • The high cost of NYC: NYC renters face outrageously high rents even before paying the broker's fee. But an upcoming court ruling may disrupt the rental market.

  • The end in sight: CRE faces pain with higher interest rates, a nearly 50% drop in lending, and plummeting valuations.

  • Renting the rich: LA mansion owners figure “Why not?” and start charging $150K in rent as sales slump due to new tax and industry turmoil.

  • Housing heatwave: Investor interest in the Sun Belt housing market drops due to rising mortgage rates, high home prices, and a sluggish rental market.

  • Family matters: The largest suburban Chicago office property, Oakbrook Terrace Tower, was acquired by the Napleton family for $60M in an all-cash deal, making it the biggest sale of a multi-tenant suburban office building in the past 18 months.

  • Out with the old: Major leadership changes are underway in the NYC real estate market as companies navigate a prolonged downturn and plan for the future.

  • Steady, stable shelter: Workforce housing is a reliable asset class during economic uncertainty, with minimal impact from high inflation.

  • High-rise glory: Miami-based developer Crescent Heights plans to sell NEMA Chicago, a 76-story skyscraper in downtown Chicago, which could fetch one of the highest prices for a property sale in recent years


Office Vacancy Rates Hit Record High Since Financial Crisis, Reaching 16.7%

Colliers' latest US Office report reveals that the national office vacancy rate has exceeded the peak seen during the Global Financial Crisis, rising to 16.7% after a 30 basis points increase for two straight quarters.

Geographic variations: Vacancy rates vary significantly across metropolitan areas. South Florida boasts the lowest metro vacancy rate at 10.1%, with Jacksonville and Las Vegas following. On the other hand, Austin has the highest metro vacancy rate at 23%, closely trailed by Houston and St. Louis. Both Central Business District (CBD) and suburban areas saw increases in vacancy rates.

Absorption patterns: Despite the overall increase in vacancy rates, some cities have shown positive absorption, with Dallas and Detroit leading in space absorption. However, cities like Atlanta, Greater Los Angeles, New York City, Phoenix, and Minneapolis-St. Paul lag in this regard, indicating a slower recovery or adjustment in these markets.

Impact on office rents: Interestingly, the spike in vacancy rates has not significantly impacted asking rents. Landlords are holding firm on rents, especially as more expensive new constructions are introduced. However, effective rents, which account for landlord concessions, align more closely with the softening market. The increasing amount of sublease space is expected to further pressure landlords as leases come up for renewal.


Looking forward: The current landscape of the office real estate market, characterized by rising vacancy rates yet stable asking rents, presents a complex challenge. Landlords are maintaining asking rents despite the softening demand, suggesting a cautious optimism or a wait-and-see approach. However, the growing abundance of sublease space and the discrepancy between asking and effective rents indicate underlying market pressures that could influence future leasing dynamics.


📖 READ: What happens in a city like NYC where the poor keep getting poorer? Well, the rich keep getting richer—while enjoying an emerging service sector of private, members-only concierge services.

🎧 LISTEN: Orrick’s Laura Saklad and CBRE Investment Management’s Julie Ingersoll discuss how property investors and occupiers can work together to facilitate return-to-office in this week’s episode of The Weekly Take.

🔍️ TALENT: Get more qualified candidates already vetted for your role, faster and cheaper than traditional executive search methods.


Walmart Takes Over Facebook's Abandoned Silicon Valley Space

Walmart To Take Over Some of Meta’s Silicon Valley Offices in Major Deal

Tishman Speyer sold the 4-building Moffett Green campus in Sunnyvale, CA, to investment firm CommonWealth Partners in 2022 for more than $700M. (CoStar)

In a deal marking one of the largest leases since the pandemic, Walmart (WMT) has agreed to take over the four-building Moffett Green campus in Sunnyvale, CA, from the company formerly known as Facebook (META).

By the numbers: The massive 720 KSF space was abandoned by Meta, which has been on an aggressive downsizing spree, reversing a decade-long expansion due to slowing revenue growth and economic uncertainty. The move to Moffett Green by Walmart represents an expansion for the retailer’s growing digital arm, which currently leases about 600 KSF in the Sunnyvale Business Park. 

Don’t need it, don’t want it: Like other tech giants, Meta has responded to a slowing economy by making deep cuts to its property holdings, shedding millions of SF it no longer uses, needs, or wants to pay for. The company estimates a $2B hit by the end of 2023 related to consolidating its offices and exiting space. However, the deal with Walmart highlights that not all tenants are in strict cost-cutting modes.

Record sublease availabilities: The broader Silicon Valley real estate market is seeing a significant shift, with tech giants like Meta, Alphabet, Salesforce, and Amazon reducing their property holdings. This trend has led to a record high of over 8.2 million square feet of sublease space in the region, with the availability rate surpassing 19%.


Zoom out: Walmart's decision to move into the Moffett Green campus signals a different approach compared to Meta's downsizing. While Meta and other tech companies are retracting their physical footprints, Walmart is expanding its digital arm, taking advantage of the current market conditions to secure space at potentially lower costs.


Global Commercial Real Estate Investment Volume, Q3 2023

CBRE's latest research on global CRE investment

CBRE's latest research on global CRE investment shows a significant decline in investment activity across the Americas, Europe, and Asia-Pacific in 3Q23 due to rising rates and a global economic slowdown. Multifamily, industrial, office, and retail sectors all experienced significant drops in investment volume.

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