Corporate Bankruptcies Increase and Are a Warning Sign

Bankruptcies are becoming a big topic, and that’s bad news for commercial real estate for a few reasons.

Corporate profits started to dip earlier this year. S&P Global Market Intelligence said last month that July corporate bankruptcy filings pushed the country past the total number of bankruptcies in 2022. The drumbeat is getting louder.

“US corporate bankruptcies filed year-to-date have exceeded annual totals for both 2021 and 2022 as companies continue to face high interest rates and a tight labor market,” wrote S&P Global Intelligence last week. “S&P Global Market Intelligence recorded 459 bankruptcy filings in 2023 as of Aug. 31, more than the full-year totals for 2021 and 2022. The year-to-date figure is also higher than the comparable total for all but two of the prior 13 years.”

The new number of companies seeking bankruptcy protection in August, 57, was lower than the 64 in July, but these numbers are “markedly above most months” in two previous calendar years.

On one hand, the numbers might seem low. Only 57 or 64 bankruptcies? But the impacts, particularly for larger companies, can be huge. The number of vendors that will get paid only partial amounts at most, the tempo of business that stops, employees who may no longer have jobs, or who might jump ship. An example is the August 6 bankruptcy and shutdown of Yellow Corporation. That included tens of thousands of employees.

“Healthcare recorded the most bankruptcies for August but remained outranked by the consumer discretionary and industrials sectors on total bankruptcies filed so far in 2023,” S&P Global wrote.

The numbers are global, with 107 so far this year, mostly from the U.S. and EU, Reuters reported. “The rating agency expects default rates to keep rising as aggressive rate hikes take their toll on companies faced with an increased cost of funding and looming debt maturities,” the story said. “Default rates are expected to hit 4.5% in the United States by June 2024 from 3.5% in July 2023, and to increase to 3.75% in Europe by June 2024 from 3.1% in July 2023, the report added.”

“By one measure — the number of Chapter 11 petitions filed — bankruptcies climbed by 54% year-over-year in August,” wrote Bloomberg. “That number is likely inflated by duplicate filings because large firms typically file several petitions to cover all their various units. Even with that qualification, however, the jump in business failures, especially for big firms, is clear, said Ed Flynn, a consultant with ABI who studies bankruptcy statistics. ‘I think a lot of it is interest rates,’ said Flynn. ‘There have been an unusually large number of large cases.’”

For CRE owners and operators, this brings up several potential issues. One is the potential for lost revenues, going forward and backward. But even worse, the result can be cost cutting measures that might hit hard at the vacancy rate of landlords.