CRE Still Extending and Pretending as Modifications Hit $19B

In the CRE world, “extend-and-pretend” is alive and well. Despite market turbulence and a shaky interest rate outlook, property owners and lenders are leaning on loan modifications as a lifeline, reported The Real Deal. 

The strategy, which involves pushing out loan due dates in the hope that rates will eventually fall, reached new heights in 2024. As the market braces for another year of uncertainty, this trend is expected to carry into 2025.

Still Pretending

According to CRED iQ, in December 2024, modifications of securitized loans hit a record-breaking $19B, surpassing the previous high set in 2020. The “extend-and-pretend” strategy remains a go-to option for both lenders and borrowers facing maturity defaults.

The approach is simple: delay and hope that interest rates drop enough to make refinancing possible. So far, that hasn’t happened, but lenders are still opting for extensions rather than taking immediate losses.

RFR’s 17 State Street is a case in point. The office building in Manhattan’s Financial District faced foreclosure after its $180M CMBS loan came due. But rather than foreclosing, special servicer Rialto Capital extended the loan by 3 years. RFR added more equity to close the deal, giving the firm more time to refinance once interest rates, hovering around 7%, fall closer to the fixed rate of 4.45% the company had been paying.

Marc Holliday, CEO of SL Green (SLG), faced a similar situation with a $740M loan tied to 1515 Broadway in Times Square. After the loan was flagged for imminent default, SL Green secured a 3-year extension, keeping the original 3.9% fixed rate. 

The property’s strong fundamentals, with full occupancy and solid net cash flow, helped the company negotiate favorable terms.

Ignorance is Bliss

As CRE faces headwinds—rising interest rates, economic uncertainty, and a shifting landscape—lenders are increasingly leaning on extensions rather than risking a loss by foreclosing. Many properties are still performing well financially, with occupancy rates high and revenue well above debt service levels.

For example, RFR’s 17 State Street had an occupancy rate of 95% and a debt coverage ratio of 3.64 times—showing that the building’s fundamentals are in peak health. The problem is the refinancing environment.

With current rates at least 7%, significantly higher than what property owners have been paying, securing new financing is nearly impossible without a rate drop. Extensions allow owners like RFR and SL Green to weather the storm and hope for better conditions down the road.

Of course, this strategy is not without risks. The longer lenders delay action, the harder it may be to recover losses if market conditions do not improve. However, if lenders continue to see solid performance from the properties involved, extending loan terms seems like a safer bet than pulling the trigger on a foreclosure.

Defaults Incoming

Fitch Ratings projects loan modifications will continue to rise in 2025, with maturity defaults also expected to tick higher. The ongoing uncertainty surrounding interest rates, along with global economic challenges, means the “extend-and-pretend” strategy could remain the dominant play for the foreseeable future.

While some had speculated that this trend might eventually give way to more resolute actions, such as foreclosures or asset sales, the reality is that many lenders are still choosing the safer path: a temporary extension, hoping that better times lie ahead. 

But with rates still high and inflationary pressures mounting, 2025 could be the year when this strategy faces its real test.