Extend-And-Pretend Created A New Wave Of Loan Maturities

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As rising interest rates have caused many commercial real estate (CRE) loans to approach default, borrowers and banks have been employing an “extend-and-pretend” strategy, where loan terms are renegotiated to avoid default and extend the timeline for repayment. However, a new research brief from Gray Capital, primarily focused on multifamily properties, suggests that this approach is coming to an end. Lenders and equity investors are growing frustrated with borrowers who have not yet secured additional capital or alternative financing to pay off their loans. They are eager to resolve the situation, as holding onto these increasingly risky assets is becoming unsustainable.

The strategy of “extend and pretend” has faced criticism. A report from the Federal Reserve Bank of New York noted that simply postponing financial issues in hopes of favorable rate changes is not a viable long-term solution. Instead, this approach has been increasing pressure on banks. In response, large banks have begun quietly offloading parts of their commercial real estate portfolios to avoid losses, particularly from office property owners who are unable to meet their mortgage obligations.

Gray Capital’s analysis, which incorporates data from the New York Fed and CoStar, predicts that a wave of loan maturities could peak in 2026 for CRE overall, with multifamily loans experiencing a surge in the third quarter of 2025. Gray also forecasts that the Federal Reserve will raise rates more gradually in the future, continuing to apply pressure on borrowers, particularly those with bridge or construction loans that have already been extended.

On a more positive note, Gray’s report sees signs of improvement in the multifamily market. Multifamily unit prices have increased, rising to about $200,000, up from a low of $175,000 in mid-2023. While cap rates have risen from 4.25% in early 2022 to 5.5% in 2024, they are expected to decrease in the coming years. CoStar’s projections suggest that loan maturities in the third quarter of 2025 will be 25% higher than their initial 2023 forecast. Additionally, multifamily construction is slowing, with fewer units being delivered and a sharp decline in new starts. This trend is leading to a more balanced supply and creating more opportunities for distressed investments.

 

Source:  GlobeSt.

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Small Multifamily Cap Rates Drop to 6%

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The small multifamily market saw notable developments in the third quarter, with cap rates averaging 6.0%. This marks an increase of 31 basis points compared to the same period last year and a rise of 98 basis points from the cyclical low recorded in 2023. The risk premium above the 10-year Treasury yield also grew, climbing 42 basis points to 201, which reflects a return to pre-pandemic levels.

According to Arbor, Q3 represented a positive shift for the small multifamily sector, with signs of market normalization. Key factors contributing to this improvement include rate cuts by the Federal Reserve, which have helped enhance pricing, cap rates, and credit conditions. Additionally, easing interest rate pressures, strong rental demand in many markets, and strengthened lending from government-sponsored enterprises have further supported the industry.

The National Multifamily Housing Council shares a similar view, noting that markets are among the least restrictive since July 2020. Sales volume and equity financing have notably improved since October, and debt financing conditions are stronger. The CRE Finance Council also reported that 85% of those surveyed expect positive market impacts, marking the highest optimism since Q3 of 2022.

However, the market is experiencing some challenges, such as a significant increase in inventory, which has slowed rent growth and raised vacancy rates. Arbor believes the ongoing demand for affordable housing will help offset these impacts. In addition, as GlobeSt.com has noted, two factors could contribute to a rise in inventory: 1) the growth in new units is concentrated in the South and West, where demographic trends are driving development, and 2) new construction starts are expected to slow in 2025, allowing demand to catch up to supply.

Looking ahead, Arbor highlighted that futures markets predict the Federal Reserve will continue to cut rates through 2025. In a recent speech, Fed Chair Jerome Powell expressed confidence that the economy and labor market can remain strong while inflation steadily declines to 2%. He also indicated that the Fed is moving toward a more neutral policy stance, though the exact path remains uncertain.

 

Source:  GlobeSt.

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CRE Investors Brace For Impact As Walgreens Plans 1,200 Store Closures

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Walgreens Boots Alliance‘s recent announcement to close 1,200 stores over the next three years, including 500 in 2025, has sent its stock plummeting to $10.45, less than half its value at the start of the year. This reflects broader struggles in the drugstore industry, where CVS has lost 28% of its value and laid off 3,000 workers, and Rite-Aid emerged from bankruptcy after slashing $2 billion in debt.

The impact isn’t just on investors. Commercial real estate (CRE) markets are also concerned, particularly regarding leased properties. Walgreens, with an estimated 8,700 U.S. stores, is closing 14% of them. CVS is closing 900 stores, and Rite-Aid 500. Factors such as competition from online and discount retailers, and the influence of pharmacy benefit managers, are pressuring profits.

While Walgreens’ real estate is generally considered high-quality, the scale of closures raises questions.

“What if lenders don’t want to refinance?” warned Jonathan Hipp of Avison Young, noting that property sales could become harder as cap rates rise and lender perceptions shift. Walgreens CEO also highlighted that 75% of its profits come from just 25% of its locations, suggesting more closures could follow.

A Trepp analysis revealed that Walgreens is a tenant in properties backing $3.69 billion in commercial mortgage-backed securities (CMBS), a major concern for CRE investors, lenders, and CMBS bondholders. Retail CMBS delinquency rates have risen, with Walgreens at 5.46%, CVS at 4.35%, and Rite-Aid at 11.82%.

These store closures are likely to have significant ripple effects across both the retail and real estate sectors in the coming years.

 

Source:  GlobeSt.

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CRE Loan Re-Defaults Hit Decade-High Levels

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The classic saying, “If at first you don’t succeed, try again,” can be admirable in many situations. However, when it comes to commercial real estate (CRE) loans that borrowers struggle to refinance, the consequences can be more complex. As noted by the *Financial Times*, this approach has contributed to a significant rise in “double defaults,” with re-defaults soaring by 90% in 2024 compared to the previous year.

As loans near maturity or face missed payments, banks have leaned on what some call the “extend-and-pretend” strategy, or “delay-and-pray” for the more skeptical. This approach involves modifying loans, extending their terms, and hoping that the Federal Reserve will lower interest rates enough for borrowers to refinance before the situation worsens—essentially hoping to kick the problem down the road without affecting the bank’s balance sheet.

Loan modifications have surged in 2024, setting the stage for a record year in terms of total modifications. In 2023, banks modified $16.8 billion in loans, with an average monthly volume of $1.8 billion. April saw the peak, with $3 billion in modifications. By May 2024, the total reached around $22 billion, and $9 billion worth of loans had been modified just in that year alone.

However, this approach carries risks. A borrower who defaults, receives a loan extension or other relief, and later defaults again creates a cycle that increases the potential for financial instability. According to *Financial Times* analysis, data from BankRegData shows that the number of CRE borrowers receiving relief and subsequently becoming delinquent again is at its highest level since 2014.

The “extend-and-pretend” strategy has been criticized before. Following the 2008 financial crisis, many argued that the approach only delayed the inevitable. More recently, a study by the New York Federal Reserve cautioned that banks’ use of this strategy post-pandemic—particularly in CRE—has led to credit misallocation and increased financial fragility. By postponing necessary adjustments, the strategy has also crowded out new credit, causing a 4.8%–5.3% drop in CRE mortgage originations since the first quarter of 2022, and contributing to the looming “maturity wall,” which as of late 2023, accounts for 27% of bank capital.

Despite rising delinquencies, banks have been slow to offer substantive relief. According to Moody’s, banks have been reluctant to offer significant payment breaks, allowing borrowers only to delay missed payments. This has led to the impression that banks are simply “kicking the can down the road,” as Ivan Cilik, a principal at accounting firm Baker Tilly, put it. While banks are attempting to manage these troubled loans, Cilik emphasized that if interest rates don’t decrease, many borrowers will remain unable to meet their payment obligations.

“We are still in the early stages,” Cilik warned. “If delinquencies continue to rise, it will become clear that these loan modifications are not having the desired effect.”

Federal Reserve Chairman Jerome Powell has made it clear that there is no rush to reduce interest rates. In the press conference following the Federal Open Market Committee’s latest meeting, Powell signaled that there is no immediate plan to lower rates, meaning that relief for struggling borrowers may not come as soon as some had hoped.

 

Source:  GlobeSt.

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Strategies For Surviving The Wall Of Loan Maturities

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The commercial real estate sector is facing an imminent surge in loan maturities.

With $5.9 trillion in commercial real estate debt currently outstanding, more than half of that total is set to mature within the next three years. In a typical market, this would represent a significant opportunity for lenders, but high interest rates and broader economic challenges mean that many borrowers will struggle to refinance as these loans come due.

However, borrowers have a range of options available, according to Ann Hambly, founder and CEO of 1st Service Solutions. She emphasizes that understanding these options is critical to navigating the upcoming wave of loan maturities.

Understanding Your Options

Many borrowers mistakenly believe they only have two choices when faced with a loan maturity: pay off the debt in full or hand the property back to the lender. In reality, Hambly explains, there are several other avenues borrowers can explore. These include extending the loan with additional capital, modifying the debt terms, raising funds, seeking a new loan, or even selling the property.

To properly evaluate these options, Hambly recommends working with a debt advisor. A skilled advisor, who is active in the market and familiar with all available solutions, can guide borrowers through the various possibilities.

“A good debt advisor is in the trenches every day,” says Hambly. “They can offer a full range of solutions tailored to the borrower’s specific situation, allowing the owner to make a more informed decision.”

Plan Ahead: Start Early

When it comes to finding the right solution, Hambly advises borrowers to begin the process at least a year before the loan matures. “We run financial models to evaluate different options, and it often takes time for the property owner to fully understand the best course of action,” she notes. If the potential solutions involve selling the property, raising capital, or securing a new loan, borrowers will need time to conduct due diligence on those options as well.

While some borrowers wonder whether it’s ever too late to explore their options, Hambly stresses that it’s never too late to start. “That said, being proactive and starting early is always the best strategy.”

Lenders Are Motivated to Negotiate

With over $3 trillion in commercial real estate loan maturities looming through 2028, borrowers aren’t the only ones feeling pressure. Lenders are also facing the challenge of managing maturing loans, and they are eager to avoid a flood of defaults. While borrowers have multiple ways to address their maturing debt, lenders are generally limited to two options: work out a deal with the borrower or take the property back.

“When an owner comes to the table with a feasible resolution, the lender needs to assess whether they are likely to come out better with the borrower’s solution or by taking the property,” Hambly explains. If the borrower presents a compelling enough solution, even if it means the lender incurs some loss, they may be willing to strike a deal.

In short, the current market conditions create both challenges and opportunities. Borrowers who are proactive, informed, and open to exploring a variety of options can navigate the upcoming wave of loan maturities more successfully, while lenders are equally motivated to find workable solutions that avoid defaults. By working with the right experts, borrowers can maximize their chances of securing a favorable outcome as their loans come due.

 

Source:  GlobeSt.

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Even Some Of The “Safest’ CRE Bonds Are Getting Hammered

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In 2024, one thing has become abundantly clear in commercial real estate: even top-rated securities backed by high-quality real estate assets can collapse, leaving investors with significant losses.

It’s a hard lesson that many had hoped wouldn’t need to be repeated after the financial turmoil of the Great Recession.

The current wave of problems began in May when it became evident that investors holding the AAA-rated tranche of a $308 million loan tied to 1740 Broadway in midtown Manhattan were only able to recover 74% of their original investment after the loan was sold at a steep discount. Creditors in the lower tranches were completely wiped out.

Since then, Bloomberg has highlighted a series of similar high-profile investment failures involving properties and deals once thought to be solid. These deals, often structured as single-asset, single-borrower (SASB) bonds, have turned out to be riskier than expected.

Bloomberg‘s analysis of nearly 150 SASBs tied to U.S. office buildings showed that many creditors could receive only a fraction of their original investment. In some cases, even investors holding the AAA-rated portions of the debt are expected to suffer significant losses.

One notable example is 1407 Broadway, a 43-story office tower in Manhattan that had a strong lineup of corporate tenants. In 2019, the building’s owners issued bonds that earned a AAA rating—comparable to U.S. Treasury bonds in terms of safety. But things took a turn when the building’s owners failed to make an interest payment of over $1 million. As a result, Wells Fargo, acting as trustee for the bondholders, filed for foreclosure earlier this year.

The foreclosure filing outlined the failure to make required payments under the loan, including an unpaid interest payment in August 2023, and the non-payment of principal and interest due upon the loan’s maturity. The outstanding debt, including principal, interest, attorney fees, and other costs, amounted to $350 million.

Other troubled properties include River North Point in Chicago, where the A tranche is 28% underwater, and 555 W. 5th St. in Los Angeles, where 51% of the A tranche is in distress. On a more positive note, the Aspiria Office Campus in Overland Park, Kansas, has only started seeing issues with the C tranche.

The underlying issue with these loans is their structure. Unlike conventional CMBS loans, which are typically diversified across multiple properties, SASBs are tied to a single asset and a single borrower, concentrating risk. This makes these loans more vulnerable to issues affecting the specific property or borrower.

That said, not all of these loans are doomed to fail. There is still strong demand for loans tied to properties in prime locations with high-quality collateral, particularly when the assets are new and well-maintained.

 

Source:  GlobeSt.

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Commercial Foreclosures Reflect Persistent Economic Challenges

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In September 2024, there were 695 commercial foreclosures across the United States, according to a recent report from ATTOM. While this figure shows a decline from the 752 foreclosures reported in May, it still indicates a heightened level of risk that surpasses pre-pandemic figures, amid ongoing financial pressures such as rising interest rates, inflation, and changing demand for commercial properties.

California recorded the highest number of foreclosures in the nation for September, with lenders initiating proceedings against 264 properties—up 12% from August and a staggering 238% compared to September of the previous year. New York followed with 92 foreclosures, reflecting a 59% increase from August and a 48% rise year-over-year.

Other states that experienced notable foreclosure activity included Florida, which reported 70 foreclosures, a 21% increase from August and 48% higher than in September 2023. In Pennsylvania, foreclosures jumped 129% from August to September, reaching 32, a 33% increase from the same month last year. Texas had 45 foreclosures, marking a 15% rise from August but a 13% decrease compared to the previous year.

This data encompasses all commercial properties with at least one foreclosure filing in ATTOM’s database, covering all three phases of the legal process: default, auction, and real estate owned.

 

Source:  GlobeSt.

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SPERRY RJ Realty’s Ron Osborne Closes Fourth Cannabis Dispensary Deal In Ocala, Florida

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Ron Osborne, Managing Director of SPERRY RJ Realty, has successfully closed another cannabis dispensary deal with lender financing, marking his fourth such transaction in the last 18 months.

The latest property is strategically located on Highway 200 in Ocala, Florida.

Osborne emphasized the importance of acquiring prime single-tenant properties on major thoroughfares, especially with pending legislation favoring such investments.

“Investing in top-tier dispensaries is a win for investors,” Osborne stated. “With most single-tenant net lease (STNL) properties yielding below 5% returns, it’s challenging to keep pace with inflation. My strategy for investors willing to consider dispensaries is to find ones offering over a 7.5% cap rate with annual rent increases on an absolute triple net basis.”

SPERRY RJ Realty anticipates significant changes in the cannabis industry, particularly with the potential reclassification of cannabis from a Schedule 1 to a Schedule 3 drug. This shift could enhance financing opportunities and attract more investors. However, local zoning laws will still govern where dispensaries can operate.

On November 5, 2024, Florida voters will decide on an amendment permitting adults over 21 to purchase and possess small amounts of cannabis for personal use. The impact of this amendment on the broader market remains to be seen.

 

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Cap Rates Adjust As The 10-Year Treasury Yield Fluctuates

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A review by CBRE Econometric Advisors highlights how commercial real estate (CRE) cap rates respond to changes in the 10-year Treasury yield.

Generally, for every 100 basis point shift in the yield, cap rates move similarly: higher yields lead to higher cap rates, while lower yields result in lower cap rates. The sensitivity varies by property type: retail (78 basis points), multifamily (75), office (70), and industrial (41).

Industrial properties show the least sensitivity due to fluctuating demand. Before 2010, they had low demand, limiting cap rate compression. However, the pandemic spurred e-commerce growth, increasing demand, which moderated cap rate growth despite higher risk premiums.

Economic conditions also influence these relationships. During downturns, spreads between cap rates and Treasury yields widen, while they narrow during recoveries. CBRE EA suggests that large federal budget deficits may slow cap rate declines, stabilizing them at higher levels compared to pre-pandemic times.

Besides Treasury yields, other factors impact cap rates. The real rent ratio, which compares current rent values to historical averages, has a strong inverse effect: -69 basis points for office, -54 for multifamily, -38 for retail, and -39 for industrial. Inflation shows weaker inverse relationships, with industrial (-41) most sensitive, followed by retail (-31), office (-28), and multifamily (-20).

Sensitivity of Cap Rates To Macro Factors Chart

Overall, the correlation between Treasury yields and CRE cap rates reflects how interest rates affect property purchase costs, prompting investors to seek higher cap rates.

 

Source:  GlobeSt.

 

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Property Type and Vintage Matter Most in Assessing CRE Loan Risks

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Since the downturn in 2022, there’s been a tendency to view commercial real estate and lenders as a single entity, but a recent MSCI report highlights that losses vary based on property types and loan origination timing.

For example, borrowers with long-term loans from 2015 likely have options to refinance due to prior price growth, while those who took short-term loans in 2022 face challenges when it comes time to refinance.

The report emphasizes that decision-making is often influenced by past experiences, but it cautions against using previous downturns as a guide for the current situation. Each downturn has unique conditions that must be considered.

MSCI analyzed over 6,400 lenders and assessed collateral values, noting that the current market is less concentrated than in past crises, which has contributed to a lack of expected distress in the market.

Although fundamental stresses exist—such as outdated office and retail spaces—many industrial properties still hold unrealized gains. Distressed assets are primarily being acquired by local operators familiar with the market rather than distant investors.

 

Source:  GlobeSt.

 

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