Lenders this year have issued a record number of foreclosure notices for high-risk commercial property loans, according to a Wall Street Journal analysis. The WSJ analysis found notices for 62 mezzanine loans and other high-risk loans this year through October, more than double 2022’s rate and likely the highest total ever for a single year. The dollar value of the foreclosures isn’t known because the loans don’t appear in property records.

The WSJ reported that the increase in mezz loan foreclosure announcements, while not large in absolute numbers, offers a more immediate measure of commercial real estate distress than mortgage foreclosure rates. Although mortgage foreclosures can take months or even years to play out, foreclosing on mezz loans is often quick and easy because they aren’t technically mortgages.

Following the Great Recession, mezz loans took off as regulators cracked down on big banks and they became more conservative lenders, according to the WSJ. Mezz debt was popular among lenders because yields often exceeded 10%, and became big business for companies such as Blackstone, KKR and Starwood Capital, which collectively lent billions. 

South Korean asset managers also became big mezz lenders, lending against hotels and office towers in cities such as New York and Los Angeles. Finance companies pooled billions from thousands of would-be immigrants in the EB-5 program, turning them into mezz loans to developers. 

That debt allowed investors to bid up prices while putting in little of their own money, inflating the CRE market leading up to 2022. Now, real-estate prices are falling and many of these loans are in default. 

“A lot of borrowers have basically said ‘I can’t hold this asset any longer, I can’t keep putting money in,’” Terri Adler, managing partner at law firm Adler & Stachenfeld, told the WSJ. “And the lenders have said, ‘OK, we’ll take it back.’”

Pictured: The Margaritaville Resort in Times Square, whose developer defaulted on a $57-million mezzanine loan in March 2023.