CRE Loan Modifications Surge Amid Maturity Pressures

CRE loan modifications have doubled over the past year, impacting borrowers and lenders facing a looming maturity wall.

Jordan B. & Han-Gwon Lung
October 24, 2024

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Good morning. A recent Moody’s report reveals that the median percentage of modified CRE loans among the country’s top 39 banks more than doubled in 1H24 on a YoY basis.

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Market Snapshot

S&P 500

GSPC

5,797.42

Pct Chg:
-0.92%

FTSE NAREIT

FNER

834.91

Pct Chg:
+1.03%

10Y Treasury

TNX

4.226%

Pct Chg:
+0.022

SOFR

30-DAY AVERAGE

4.96%

Pct Chg:
0.0%

*Data as of 10/23/2024 market close.

LOAN LANDSCAPE

CRE Loan Modifications Surge Amid Maturity Pressures

The CRE sector is witnessing a big uptick in loan modifications as borrowers and lenders grapple with looming loan maturities and escalating debt costs.

More modifications: A recent report from Moody's reveals that the median percentage of modified CRE loans rose to 48 basis points in the first half of 2024, up from 18 basis points in 2023. Among the 39 banks analyzed, modification rates varied significantly—some banks had no modifications, while others modified more than 2% of their portfolios.

Rising debt: Banks appear to be responding to increased debt service costs, primarily from variable-rate loans and refinancing needs. Initial expectations of Federal Reserve rate cuts, which were predicted to begin as early as March 2024, were unmet until September. This delay forced banks to implement modifications as borrowers faced increased financial strain. By mid-2024, banks had modified roughly 1% of their total CRE loans.

Common adjustments: The most frequent modifications involve extending loan terms or deferring payments. Notably, these adjustments do not reduce the principal or interest rates, only alter payment timing. The largest banks—those holding $100B-$700B in assets—saw the highest median of modifications, with global investment banks posting the biggest year-over-year increases.

Zoom in: Smaller banks (under $100 billion in assets) had the lowest median modification rate at about 0.3%. However, these banks tend to have higher CRE concentration, often exceeding 50% of their total loan portfolios. Despite this, their limited exposure to large urban office markets acts as a mitigating factor against broader credit risks.

➥ THE TAKEAWAY

Too little, too late: With interest rate relief arriving later than hoped, CRE loan modifications are no longer just a contingency—they’re becoming standard practice. CRE stakeholders continue to face ongoing challenges as they do their best to navigate the approaching maturity wall. Meanwhile, banks and borrowers alike must continue leveraging term extensions and payment deferrals to manage financial pressures.

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✍️ Editor’s Picks

Financial revolution: A proposed bill by Sen. Tim Scott aims to allow average investors access to private markets via a single financial literacy test.
Get a quote: With the recent rate cut, it’s time for developers to get off the sidelines ahead of the competition. C-PACE offers a fixed-rate, 30-year amortization period and applies to new and renovation projects.
Earnings flop: CoStar Group's (CSTR) Q3 earnings report revealed a steep 34% drop in new bookings, prompting an immediate 10% stock drop on Wednesday.
Leading ladies: In January, Michelle Herrick will officially lead JPMorgan Chase’s (JPM) $145B CRE business, succeeding Al Brooks after a decade.
Extended tightening: Federal Reserve officials hint at the possibility of prolonged higher interest rates, driving 10-year Treasury yields up to 4.2% amid economic uncertainty and inflation risks.
Sales slump: US home sales are on track for their worst year since 1995, as high mortgage rates and rising home prices keep buyers off the market.

🏘️ MULTIFAMILY

Building Up Austin: Austin's new Density Bonus 90 zoning program permits developers to build up to 90 feet high for more affordable housing projects.
Manhattan makeover: Vanbarton Group bought 1011 First Avenue in Manhattan for $100M, aiming to convert the historic building into residential housing.
Rising rents: Despite a 96.2% occupancy rate and growing demand, Orange County apartment rents hit a new high of $2,854 in Q3, while multifamily investment sales plunged by 90%.
Housing innovations: Turner Impact Capital launched a $750M fund for affordable housing, aiming to preserve 483 units across Las Vegas and Minneapolis.
Builder's remedy: Madison Realty Capital proposed a 422-unit 18-story apartment building in Santa Monica with 64 affordable units, shops, and a pool.
Distress on the rise: Minneapolis leads CRE distress rates nationally at 36.2%, with Stamford following behind at 32.2%, as the office sector continues to drive up distress in top MSAs.

🏭 Industrial

New record: Hines bought a 2,460-unit self-storage facility in Cerritos for $91M, marking the largest self-storage sale in history, and highlighting strong market demand.
Florida boom: KKR (KKR) acquired a 1.2 MSF industrial portfolio in Central Florida, adding to nearly 8 MSF already acquired in 2024.
Healthy and thriving: Rexford Industrial (RXR) purchased a 278.7 KSF Fontana facility for $70.1M in California’s Inland Empire, above the market average.

🏬 RETAIL

Overnight exit: Amazon (AMZN) is shutting down its same-day delivery service "Amazon Today," with bulk closure by Dec. 2, impacting around 300 employees.
Retail Renaissance: PMAT Real Estate Investments sold the nearly 276.3 KSF Waterside Marketplace in Detroit, anchored by top retailers, to Octave.
Gotta get groceries: Slate Grocery REIT (SRRTF) refinanced $500M in debt to secure better terms, benefiting its American grocery-anchored retail properties.

🏢 OFFICE

WeWork wannabe: Jonathan Larmore, a strip mall investor, was convicted of fraud for his attempted $77M fake takeover bid of WeWork, which caused the stock to jump up 150%.
Pandemic discount: Office properties in key markets are seeing significant price drops post-pandemic, such as Chicago's average PSF price falling from $217 to $98.
Denim dreams: Swedish entrepreneurs secured a long-term lease for the Frame denim brand in Beverly Hills, buying the building at $61M.

🏨 HOSPITALITY

Manhattan takeover: Yellowstone Real Estate Investments acquired the former Maxwell hotel at auction for $140.5M, and is pursuing distressed Manhattan properties.

📈 CHART OF THE DAY

Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy on Tuesday rose two-tenths of a point last week to 61.4%. Tuesday was the peak day for all 10 tracked cities, following a dip in occupancy the previous Thursday, 10/3, which was Rosh Hashanah.

New York City had the largest decline on Thursday, dropping 8.3 points to 50.1%. The average low was on Friday at 32.7%, down half a point from last week.”