When the going gets tough in CRE, the smart get their loans modified. At least those that have loan maturities facing them.
There have been many recent signs of problems in CRE loans and statuses. No one in the industry knows what will happen and there is significant opacity in current conditions, particularly given low transaction rates.
Trepp released a research note about a rise of loan extensions in 2023, increasing because of rising uncertainty and high interest rates. For example, a borrower hasn’t paid off the balance on a 2013 fixed-rate office loan. Refinancing would require a higher monthly interest rate. If they don’t refinance, then the borrower returns the keys to the lender, which then most likely sells the property at a loss. This is why loan modifications are becoming important in CRE, because they “have come in handy for the parties that don’t wish to see the above scenario play out,” Trepp wrote.
Because the data sources are CMBS loans with public data, the results may not be representative of anything else. Learning how many other types of lenders are making such moves is impossible when the transactions and records are private. However, it is some of the best available data and so worth the attention of investors, developers, and owners.
But the rates of need vary greatly among the different property types. As anyone in the industry or even just reading about it might guess, office properties made up 72.9% of the total $3.2 billion in loan extensions, or roughly $2.4 billion. The way Trepp put it, “Of all property types, the office sector faces the steepest refinancing challenges as office properties are struggling with occupancy and financial performance in the post-pandemic era.” Another complication is that no one knows when things will, or if, go back to a more normal type of usage pattern. “The weighted average LTV for office loans securitized in 2023 is 48.6% compared to 55.1% in 2022 and the weighted average debt yield is 13.8% for 2023 office loans compared to 10.2% in 2022.”
Next in line is retail, with a modified loan balance of $558 million, or 17.2% of the total. Third was mixed use: $252 million and 7.8% of all the modified loans. The last two categories shown were at $42 million, or 1.3%, for lodging and $26 million, or 0.8% for industrial.