CRE Loan Modifications Surge as Maturity Wall Looms

For years, the CRE industry — borrowers, lenders, developers, analysts, brokers, and regulators — have wondered how everyone would manage coming waves of maturities. Answers are starting to develop.

Earlier this month, Moody’s released a report that examined commercial real estate loan modification disclosures from 39 banks. The median percentage of modified CRE loans more than doubled year-over-year in the first half of 2024. That moved from 18 basis points from 2023 to 48. Depending on the bank, the offered modifications ranged from none to more than 2%.

The 39 were all banks with more than $100 billion in assets and CRE to tangible common equity greater than 150%. Additionally, they had detailed disclosures on CRE loan modifications. It’s unclear how Moody’s is measuring assets as the Federal Reserve’s list of large U.S. chartered commercial banks shows only 29 with at least $100 billion in assets.

Moody’s thought it was a likely response to increased debt service costs — presumably from variable-rate loans or a need to refinance a maturity. Many lenders and borrowers had hoped that rate cuts could reduce pressures and allow both parties to reduce financial strain. In the early part of 2024, futures markets had predicted that the Federal Reserve would begin cutting the federal funds rate as early as March. That would in theory have allowed a long series of cuts moving down toward where rates had been not long before. Instead, the first rate cut came in September.

And so, reality didn’t cooperate. To Moody’s, the results have been evidence that banks with large concentrations of CRE loans, particularly in office, run a credit risk from the strain on borrowers.

The most common loan modification in both the first half of 2023 and 2024 was term extensions. The second most frequent was payment deferrals. Moody’s said a “noteworthy feature” was neither of these modification types affected neither principal amounts nor interest rates, just payment timing.

Banks with between $100 billion and $700 billion in assets had the highest median for loan modifications. Global investment banks had the largest year-over-year increase.

Banks with less than $100 billion in assets had the lowest median percentage of modifications, although they are more likely to be concentrated in CRE lending than larger banks. However, they are less likely to have heavy exposure to cities and large office towers, which is a “credit positive offset to concentration risks,” said Moody’s.