Rate Of Office Loans Landing Extensions, Modifications Soars

Los Angeles

Commercial real estate lenders are showing an increasing readiness to work with borrowers whose loans are rapidly approaching maturity.

Banks are stepping in to work out deals and help borrowers avoid defaults and mitigate short-term losses, according to a Reuters analysis. The aim is to help suffering properties survive long enough to return to profitability and refinance once interest rates fall.

Roughly $2.1B of CMBS loans on office properties matured in May, 36.5% of which were modified or extended after three months of no modifications or extensions between February and April, according to Moody’s Analytics data reported by Reuters.

The largest single-asset office CMBS loan that was set to mature this year, the $783M loan backed by the Seagram Building at 375 Park Ave. in Manhattan, was granted an extension in May when RFR agreed to put more equity into the property. The next month, Tishman Speyer landed a two-year extension on its $485M loan at 300 Park Ave.

The reported increase in modifications comes two weeks after top U.S. regulators told lenders to find accommodations and workouts for upcoming maturities.

The country’s 23 largest banks last month passed a stress test from the Federal Reserve, showing they could withstand a hypothetical 40% drop in commercial real estate prices. Those banks hold one-fifth of all loans covering office and downtown retail.

Overall, approximately $103B in commercial mortgage-backed securities loans are set to mature this year, with a further $126B due to mature in 2024. But the office sector faces more challenges than other asset classes, with $20B in CMBS loans maturing this year, per Trepp data.

The default rate on office properties is around 4% and could reach 6% by the end of the year, Kevin Fagan, head of CRE economic analysis at Moody’s Analytics, told Reuters, adding that defaulting is not a “viable economic decision” for most borrowers.

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