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Loan Modifications Nearly Double As Extend & Pretend Tactics Surge

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Loan modifications—often labeled “extend-and-pretend” strategies for obvious reasons—have become a regular tool in the commercial real estate (CRE) sector. And according to a new analysis from CRED iQ, their use has increased sharply.

CRED iQ reviewed trends in modifications across various loan types, including CMBS, SBLL, CRE CLO, and Freddie Mac loans. The analysis, which looked at both recent trends and data over the past three years, found a significant uptick in these modifications.

Between March 2024 and March 2025, the volume of modified loans nearly doubled, jumping from $21.1 billion to $39.3 billion—an 86.3% increase. Just last month, $2 billion worth of modifications were made across 47 loans, marking the highest activity since May 2024.

It’s important to note that the data doesn’t cover commercial bank CRE loans, which are a major portion of the overall market. Even so, the figures provide insight into growing reliance on loan extensions. Modification sizes have ranged from as little as $11.3 million in July 2022 to as much as $2.4 billion in July 2023.

Many of these extensions stem from loans initially extended in 2024, now creating a wave of upcoming maturities. Expectations that Federal Reserve rate cuts might ease refinancing pressures have largely faded, leaving borrowers to manage rising debt costs on their own. In this environment, banks are eager to avoid labeling loans as troubled, so modifications are often the preferred route.

One example CRED iQ highlighted is Chicago’s Willis Tower. The 3.8 million-square-foot building had a $1.33 billion interest-only loan originally due in March 2022. After multiple one-year extension options, a recent modification extended the due date further—this time to March 2028. Despite this, the tower is performing decently, with an 83.1% occupancy rate and a debt service coverage ratio of 1.32.

So what does all this mean in a market without the relief of lower interest rates? CRED iQ suggests these trends reflect a broader change in CRE financing. The nearly $40 billion in modified loans is a signal of both caution and adaptability in the sector.

“The commercial real estate sector is at a turning point,” CRED iQ said, with the implications for investors and lenders still unfolding.

 

Source:  GlobeSt.

 

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CRE Debt Challenges Escalate, Threatening Banking Sector

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The U.S. banking system remains under pressure due to significant exposure to the commercial real estate (CRE) market, exacerbated by persistently high interest rates. As a result, banks face increasing risks as potentially troubled loans approach maturity, according to an analysis by Florida Atlantic University (FAU).

Since 2023, troubled debt restructuring for commercial construction, multifamily housing, and both owner-occupied and non-owner-occupied mortgages has surged, tripling to $18 billion in the fourth quarter of 2024. This marks a sharp increase from $6 billion recorded in the second quarter of 2023.

While more than half of this distressed debt stems from non-owner-occupied nonfarm and non-residential properties, the FAU report highlights “serious deterioration” in multifamily and commercial construction loans.

As of the fourth quarter, 59 out of the 158 largest U.S. banks face CRE exposure exceeding 300% of their total equity capital. FAU’s U.S. bank exposure screener identifies the most vulnerable financial institutions, including Flagstar Bank, Zion Bancorp, Valley National Bank, Synovus Bank, Umpqua Bank, and Old National Bank.

Across banks of all sizes, 1,788 institutions now have CRE exposure surpassing 300%, up from 1,697 in the third quarter. Nearly 1,000 banks have exposure exceeding 400%, 504 exceed 500%, and 216 surpass 600%. Meanwhile, the aggregate industry-wide CRE exposure remains at 132%, unchanged from the previous quarter.

Regulators have been urging banks to reduce their exposure, but doing so without signaling financial weakness presents a major challenge, according to Rebel A. Cole, a finance professor at FAU’s College of Business.

“To navigate this situation, many banks are resorting to an ‘extend and pretend’ approach, restructuring loans by extending their maturities under the same terms,” Cole explained.

This strategy allows lenders to postpone refinancing in hopes that interest rates will decline, making repayment more manageable in the future.

 

Source:  GlobeSt.

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Extend-and-Pretend Drives Record Modifications

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The long-term outlook for commercial real estate (CRE) loans, particularly those in the office space sector, seems to be facing mounting challenges.

According to the data from CRED iQ, there’s been notable growth in loan modifications over the past few years, which reflects the ongoing strain on property owners and the broader CRE market. The numbers show a shift, where properties that might have been able to handle their debt a few years ago are now being pushed to restructure their loans due to economic pressures like high interest rates and changing market conditions.

In particular, examples like the Energy Centre in New Orleans and 17 State Street in New York highlight how properties are struggling with refinancing and the pressure to avoid defaults. Even though certain properties still show solid metrics like occupancy and debt service coverage ratios (DSCR), refinancing remains a significant hurdle, especially with the Fed’s rates holding steady for the foreseeable future.

What stands out from the article is the potential domino effect caused by the combination of tighter lending conditions, higher interest rates, and a volatile bond market. This environment could cause refinancing and loan modifications to become more challenging, especially for lower-tier properties like Class B/C offices and malls. Additionally, the question remains of how long lenders will be willing to keep modifying loans, as the hope for a return to lower rates might fade with the Fed’s current stance and concerns about inflation and national debt.

Do you think there’s a chance that CRE loans might stabilize if the economy shifts, or do you expect the difficulties to persist longer than anticipated?

 

Source:  GlobeSt.

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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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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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Lenders Turn Up The Foreclosure Heat

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Many analyst takes on commercial real estate markets have been in terms of where loans stood. This includes CMBS, banks and what have you – but the question has been percentages of delinquencies or properties in special servicing.

There’s been an assumption that banks in particular have been indulging in the practice colloquially called “extend and pretend.” In April, Autonomous Research estimated that 40% of bank CRE loans maturing this year actually being holdovers from 2023 and that banks on average are reserving 8% of their CRE portfolios, which is about five times more than normal. PGIM Real Estate that expected bank CRE maturities was up 35% from previous estimates.

But where the concrete meets the pavement, if you will, is when lenders take back properties, whether because borrowers have walked away, or the hammer has come down in a foreclosure. That’s on the rise, according to a Wall Street Journal report.

Portfolios of foreclosed and seized properties reached $20.5 billion, according to data from MSCI. That’s a 13% quarter-over-quarter jump and the highest figure since 2015.

Back to extend and pretend. No lender wants to take the keys back. They don’t have the expertise in profitably running a building nor the desire. Legally holding the property means that the value hits the balance sheet in an uncomplimentary way and investors start asking what is going on.

However, delay tactics last only so long because auditors will eventually say the time has come to admit defeat. Then investors can see what is happening and they start asking pointed questions.

A Journal graph of the MSCI data shows the total of seized properties over time. The current $20.5 billion isn’t at the heights of the Global Financial Crisis when it was more than double. But the trend line is on an upswing, suggesting a good chance that things could get considerably worse, especially in offices, where only 15% are in the Class-A category, which has maintained values higher values and lower vacancies. The remaining 85% are in potentially big trouble because there is decreasing evidence that they can be saved by would-be tenants.

Higher rates of foreclosures have, in the past, signaled the end of a crisis and the arrival of a bottom. Lenders who take back properties usually want it off their books quickly. That can aid price discovery, as the Journal notes, and help the market start to work again.

Currently, the economy is looking relatively strong, with a first Fed rate cut possibly in the offing in September. Should there be a slide, however, CRE markets could get far worse.

 

Source:  GlobeSt.

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Loan Modifications More Than Doubled Last Year

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The move for lenders to find ways to avoid action on troubled CRE loans has been called “extend and pretend,” though “delay and pray” might be even more apt.

While an institution can avoid significant and final decisions, it can put off the day when it takes a hit to its balance sheet, hoping that find another solution in the meantime. Who wants to take possession of a property along with the responsibility of disposing of it?

But how much of this activity has been going on and how long could it be sustained? CRED iQ has analyzed loan modifications during this period of significantly elevated interest rates.

“The number of modifications in 2023 more than doubled compared to 2022,” they said. “Of the $162 billion in securitized commercial mortgages which matured in 2023, 542 loans were modified with cumulative balances just over $20 billion, which is a 150% increase from the amount of modifications that occurred in 2022. According to CRED iQ’s 2024 CRE Maturity Outlook, 2024 will see $210 billion in securitized maturities. CRED iQ predicts that the modification trend will continue to surge as more special servicers decide to ‘pretend and extend’ versus foreclose on these commercial properties.”

In office, 26% of $35.8 billion in CMBS loans that matured last year were paid in full. Borrowers either couldn’t get refinancing (which likely would have meant a heft injection of equity into projects) or couldn’t sell for a price that allowed them to gracefully exit the stage.

Since February 2022, so two years, 593 office loans transferred to special servicing. Out of them, 13.7% were modified, 14.0% returned to the master servicer as corrected, 8.4% were paid off, and the remaining 63.9% are still with the special servicer.

“Extending the loan term has been the most popular modification type in 2023 and so far in 2024 (excluding grouping categories Other and Combination),” they wrote. “By deal type, CRE CLO deal led all categories and comprised nearly half of all loan modifications, followed by SBLL deals.”

CRED iQ gave two examples of the largest loan modifications to date — 1.6 million square feet One Market Place in San Francisco and 249,063 square foot mixed use in the Chelsea submarket of New York City. Well enough, but how long can this go on without investors, regulators, or others demanding a permanent ending?

 

Source:  GlobeSt.

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