How CMBS Loans Are Being Modified

Trying to understand the whole of commercial real estate financing through CMBS is short-sighted. The mechanism isn’t representative because the properties tend to be larger and likely riskier because the lenders can command higher interest rates. However, CMBS has one key advantage in terms of summary — public information.

Digging in may not offer the satisfaction of true representative universality, but it at least offers some insight and data that someone can analyze. One example is the deep dive Trepp recently took into CMBS loan modification trends.

“As of the end of April, there is about $131.3 billion in outstanding, non-defeased CMBS loans that are current on payments that are still due to mature in 2024,” Trepp wrote. “For maturities through 2027, there is about $321.4 billion in CMBS loans of the same criteria that are scheduled to mature. About 27% of this maturing volume is made up of maturing CMBS office loans.”

In 2023, CMBS loan modification kicked into high gear, with the phrase “extend and pretend” becoming popular. Many property owners have been unable to refinance loans given higher interest rates and tighter underwriting standards. Loan modification and extension give lenders a way to keep troubled loans from showing up on their balance sheets.

Loan modification volumes grew to nearly $4 trillion by the third quarter of 2023. They dropped to just over $1.5 trillion in 2023 Q4, and then back up again to about $2.5 trillion of newly modified loans in the first quarter of 2024 and delinquency rates are climbing, so the trends may continue upwards.

As anyone following CRE markets might expect, office CMBS loans have made up the largest single portion — 42% or $4.2 billion — of all loan modifications in 2023. Retail was second at about $2.6 billion.

The biggest portion of CMBS loans — 64% of modifications between the beginning of 2023 and April 2024 — and conduit loans have made up 35% of all the new CMBS modifications.

Some single examples of recently modified loans include “the $1.2 billion 555 California Street Campus loan which backs the entirety of the single-asset SFO 2021 555 deal was modified with a one-year extension, pushing the loan maturity to May 2024,” Trepp writes. “Most recently, the loan posted a debt service coverage ratio (DSCR) based on net cash flow (NCF) of 1.18x in 2023, which fell from a 1.78x DSCR in 2022 and a 2.60x DSCR in 2021. The loan showed an occupancy of 94% for the 2023 year.”

The $975 million IMC Portfolio loan went to the special server at the end of March 2024 “for imminent maturity default and was modified about two weeks later with a maturity date extension to June 2026.