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Loan Modifications Surge as Banks Hit 'Extend-and-Pretend' Limits

Loan Modifications Surge as Banks Hit 'Extend-and-Pretend' Limits

U.S. banks are ramping up CRE loan modifications, especially smaller ones, as rising delinquencies and fading "extend-and-pretend" strategies hit a wall.

Jordan B. & Han-Gwon Lung
December 18, 2024

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Good morning. US banks, especially smaller ones, are accelerating CRE loan modifications as delinquencies rise and the timeline for “extend-and-pretend” strategies runs out, signaling a potential market reset ahead.

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Market Snapshot

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Keep Climbing

Bank CRE Loan Modifications Rise as Lenders Reach Limits

Rising loan modifications reveal cracks in commercial real estate’s go-to “extend-and-pretend” strategy, with lenders reluctant to kick the can further down the road.

More modifications: Banks increased modifications for non-owner-occupied (NOO) CRE loans by 65 basis points over the first nine months of 2024—a 35% jump since mid-year, according to Moody’s. Smaller banks saw the largest percentage spike.

Small banks (<$100B in assets): Recorded a dramatic 217% spike in modifications, from 10 to 32 basis points, though their total share of new modifications remains small.
Mid-sized banks ($100B–$700B): Posted the largest volume and a 61% increase, from 120 to 193 basis points, signaling more active loan adjustments.
Large banks (>$700B): Saw only a 14% uptick, from 69 to 79 basis points, highlighting relative stability compared to smaller peers.

Bisnow

No more pretending: For years, “extend-and-pretend” strategies helped lenders and borrowers sidestep distressed asset sales in low-liquidity markets. But patience is running thin. Office CMBS loan delinquencies hit 11.2% in November 2024, triple early 2023 levels, with projections peaking above 14% in 2025. Multifamily properties are also feeling the strain as rising costs and slowing rent growth erode financial stability.

Distressed sales are rising: The market is seeing more forced sales as lenders opt to accept losses. Moody’s reports seven transactions between April and August 2024 closed at losses exceeding $100M, compared to two in 2023. High-quality assets can still secure private capital, but at steep costs, reflecting today’s heightened risk environment.

What’s the risk? The Federal Reserve Bank of New York warns that stacking loan maturities into future years through extend-and-pretend strategies amplifies systemic risks, potentially leading to sudden financial shocks. These tactics have also dampened new debt origination, cutting off funding for projects that could drive growth.

➥ THE TAKEAWAY

Why it matters: Loan modifications have delayed immediate distress, but extend-and-pretend is running out of road. With delinquencies rising and distressed sales climbing, 2025 could bring significant corrections—and fresh opportunities for investors ready to deploy capital and pencil deals, especially in CRE debt.

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✍️ Editor’s Picks

Sinking feeling: A University of Miami study revealed that 35 luxury high-rises in Miami-Dade County sank up to 3 inches since 2016, raising alarms about structural risks amid rising sea levels.
Raise capital faster: In just two quarters, Helu Capital was able to increase their equity by 300% thanks to Agora. By streamlining communication and centralizing document management, they reached operational efficiency and had time for what matters most—growth. (sponsored)
Fear and Greed: The Burns + CRE Daily Fear and Greed Index crossed into expansion territory for the first time in several quarters. Read the full report.
Broker battle: REBNY is suing to block NYC’s FARE Act, arguing it violates free speech and private contracts while threatening broker incomes, as the law shifts broker fees from tenants to landlords.
AI megabucks: SoftBank commits $100B to US AI startups and infrastructure, aiming to create 100K jobs and drive data center growth while tackling power and labor challenges.
Proptech in 2025: Proptech leaders anticipate accelerated AI adoption, more M&A activity, and scalable startups as the industry navigates digital transformation and integration challenges.

🏘️ MULTIFAMILY

Multifamily surge: The US multifamily market, now valued at over $6T, has thrived thanks to strong capital markets, GSE support, and robust investor participation.
Housing crossroads: The Trump administration may shift its focus on affordable housing by bolstering Housing Choice Vouchers while facing potential cuts to the Low-Income Housing Tax Credit.
Skyway revamp: Kolter Multifamily’s purchase of St. Petersburg College’s Allstate Campus should transform South St. Pete’s Skyway Marina district into a mixed-use hub with multifamily potential.
Social housing push: The LA City Council approved a $168M spending plan for Measure ULA funds, allocating $100M toward tenant-driven social housing programs.
San Pedro plans: Trammell Crow takes over a 281-unit project in San Pedro, reducing the building size and parking while maintaining unit count, as the developer expands its LA residential footprint.

🏭 Industrial

Industrial boost: TA Realty acquired the 505.44 KSF Ironwood Commerce Center in Opa-Locka, FL, as Miami’s industrial market remains resilient with rising investment activity and solid demand.
Amazon showdown: Amazon (AMZN) workers at two NYC warehouses, backed by the Teamsters union, threaten a strike over unsafe working conditions and wage disputes before the holidays.
Datacenter spree: Australian HMC Capital’s new DigiCo Infrastructure REIT bought $1B in US data centers, driven by AI and cloud demand, and plans to convert and expand globally.
Steelmaker bankruptcy: Syracuse-based Crucible Industries filed for bankruptcy, raising questions about the future of its 70-acre industrial site with over 1 MSF of manufacturing space.

🏬 RETAIL

Surf’s up: McKinney, TX, is set for a $200M mixed-use project featuring a 4-acre surf lagoon, 100 KSF of office space, and family-focused entertainment.
Atlanta expansion: Terry Commercial plans The Gateway, a 40 KSF retail and restaurant development in Jasper, GA, part of a master-planned community with 400 residential units.

🏢 OFFICE

Office rebound: After 5 quarters of decline, the US office market is seeing positive momentum with net absorption on track to hit 9.4 MSF in Q4, driven by economic resilience and job growth.
Leasing surge: Manhattan’s office market gained momentum in November, with major leases signed by Ropes & Gray, TPG, Verizon, and Apple, signaling robust activity as the year wraps up.
Chips on the table: Nvidia (NVDA) is growing rapidly with a 100.23 KSF office lease in San Jose, boosting Silicon Valley's recovering office market as tech leasing rebounds amid soaring AI demand.

🏨 HOSPITALITY

Nature stay: Marriott (MAR) is launching an outdoor brand in 2025 by buying Postcard Cabins' 1.2K tiny cabins and Trailborn's 559-room portfolio, targeting the growing demand for nature travel.
Monopoly makeover: An NJ developer is set to break ground on The Top Hat, a Monopoly-themed boutique hotel in Atlantic City's Orange Loop, as part of a broader revitalization effort.

📈 CHART OF THE DAY

Indoor malls saw 6.4% more traffic YoY in November, with open-air shopping centers up 4.8% and outlet malls rising 3.8%.

This exceeded pre-pandemic levels as Black Friday weekend visits surged by up to 6%, signaling strong retail sales and growing demand for in-person shopping.