How Some Lenders Are Managing CRE Loan Modifications

That there was going to be trouble was obvious back in the late summer and early fall of 2022. Interest rates were climbing fast. Too many CRE properties got financing in a zero-interest-rate environment that encouraged high leverage and refinancing at current rates would be different, to put it mildly.

Not everyone had or was willing to part with the extra capital necessary to keep a building afloat and financially viable. Then, in some markets, particularly office, it wasn’t even clear whether there would be enough revenue when a lot of businesses questioned whether they needed as much space as they previously had, given work-from-home pressures. CBRE Economic Advisors has estimated that office alone faces a $73 billion financing gap.

And that is just one sector. Swiss Re Instituted said in April 2023, commercial real estate will see rough sledding for years.

However, given recent financial strains on many banks, including ones that made substantial numbers of CRE loans, getting a property returned is the least of their desires. The institutions don’t want a more complicated existence like when at the opening of the year Veritas defaulted on a $448 million CMBS loan.

Loan modifications are already underway with many lenders that don’t want to write off value and which were probably nudged on by the final policy on CRE loan accommodations and workouts announced by the Office of the Comptroller of the Currency, the Treasury, Federal Deposit Insurance Corporation and National Credit Union Administration. The policy included detailed examples, each with multiple scenarios, in retail, hotel, residential acquisition, development, and construction, SFR construction, land acquisition, condominium construction, and conversion construction loan, commercial operating line of credit in connection with owner-occupied real estate, land loan and multifamily property.

Reuters has just reported that banks are increasing their efforts to prevent losses on existing loan. “Lenders are offering borrowers loan extensions and modifications, selling derivatives to fix interest costs, and offering subsidized loans to investors to purchase defaulted loans” according to CRE analysts and industry data.

Not surprising, since they face significant exposure. Moody’s Analytics said in April that “the 135 US regional banks (generally considered as those with about $10 billion to $160 billion in assets) hold just 13.8% of debt on income-producing properties” and that the “top 25 largest banks, which the Federal Reserve considers “large”, hold 12.1%.”

So, lenders are doing what makes sense, which is working with borrowers to avoid holding bad debt. Workspace Property Trust negotiated a modification and extension of a $1.3 billion CMBS facility with “significant equity participation” a few weeks ago at the beginning of July. Tishman Speyer got an extension to its $485 million loan for 300 Park Avenue.

But then there are the lenders who are heading for the exits by looking to sell off their loans. PacWest Bank sold its real estate lending arm to Roc360 and its CRE loan portfolio to Kennedy-Wilson.

“The banks are already calling us, trying to sell their loans,” Marcel Arsenault, CEO of Real Capital Solutions, recently told GlobeSt.com. “They see what’s coming and they’re trying to get their loans off the books.”