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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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High Financing Costs, Looming Loan Maturities Among Top CRE Challenges

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The Counselors of Real Estate have highlighted ten current and emerging issues significantly impacting all sectors of real estate, with high financing costs and impending loan maturities topping the list.

Despite recent cooling inflation and the Federal Reserve’s first anticipated rate cut announced in September, high financing costs continue to burden the commercial real estate market. Investors, who had hoped for as many as five rate cuts this year, are facing disappointment, which is dampening expectations for commercial properties, according to James Costello III, chief economist at MSCI Real Assets.

“Higher costs undeniably complicate the assessment of market value and the feasibility of deals,” Costello stated. “On a brighter note, the sharp decline in transaction volume seen last year is beginning to stabilize.”

Nevertheless, Costello warned that transaction volume could dip again in the third quarter, emphasizing that rate cuts alone may not stimulate deal-making.

To reignite transaction activity, both buyers and sellers must engage in the market. Currently, many owners are hesitant to sell, while buyers are cautious due to high prices, often waiting for opportunities to acquire distressed assets.

The real estate sector is struggling to address a significant amount of impending debt maturities, as noted by Constantine Korologos, clinical assistant professor and principal at New York University’s SPS Schack Real Estate Institute. Almost $1.8 trillion in commercial real estate loans are set to mature by the end of 2026, according to Trepp.

Lenders have been extending and modifying maturing debt, anticipating lower interest rates, new equity capital, or improved net operating income (NOI). However, Korologos warns that this strategy has limits.

“If, or more likely when, these extensions reach their endpoint, lenders will face a growing number of challenging loans to manage,” Korologos explained. “Banks hold a large portion of this debt and have limited options due to regulatory constraints. They can’t keep extending loans without adequate capital reserves.”

For borrowers with near-term maturities, the new debt service payments could rise by 75% to even 100% compared to their previous loans. This increase in payment obligations elevates property values and complicates refinancing efforts as values reset.

“Even if interest rates decrease as expected, it may not suffice for borrowers facing maturity balances that are too high to refinance,” he added. “This scenario is likely to lead to a shakeout among less stable operators and owners lacking sufficient capital.”

 

Source:  GlobeSt.

 

 

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Regulators Crack Down As CRE Loan Losses Pile Up

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U.S. banks are grappling with increasing delinquencies in commercial real estate (CRE) loans, which climbed to 1.4% in Q2. This marks the seventh consecutive rise, driven by high vacancy rates and falling office building values. In response, banks are boosting loss reserves and slowing new loan issuance, with CRE loan growth slowing to 2.2% year-over-year in Q2.

S&P Global forecasts a peak in CRE loan maturities in 2027, with $1.26 trillion expected to come due. For 2024, $950 billion in CRE mortgages are maturing. Federal regulators are permitting loan extensions but are keeping a close watch on banks with high CRE exposure.

Recent M&A activity, such as Bank of America’s $2.9 billion acquisition of Washington Federal Bank’s properties, reflects increased regulatory attention. Despite this, current delinquencies are lower compared to the 2008 financial crisis, thanks to stricter underwriting standards.

The Federal Reserve is likely to cut interest rates soon, but with new CRE loan rates significantly higher than those maturing, the impact may be limited.

 

Source:  SFBJ

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