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CRE Loan Modifications Double as Borrowers Face Maturities

A Moody’s report reveals that the median percentage of modified CRE loans has more than doubled in 1H24, revealing more strain on borrowers.
CRE Loan Modifications Double as Borrowers Face Maturity Pressures
  • Moody’s reports a significant rise in CRE loan modifications, with the median percentage increasing from 18 bps in 2023 to 48 in the 1H24.
  • The most common modifications were term extensions and payment deferrals, helping borrowers manage cash flow without changing principal amounts or interest rates.
  • Banks with $100B to $700B in assets showed the highest rates of modifications, with global investment banks seeing the largest increase YoY, highlighting ongoing credit risks.
Key Takeaways

As reported by GlobeSt, the commercial real estate sector is seeing a sharp increase in loan modifications. Borrowers and lenders are navigating a challenging landscape of maturing loans and high debt service costs. 

According to a recent report by Moody’s, the median percentage of modified CRE loans among 39 large banks more than doubled in 1H24, rising from 18 bps in 2023 to 48 bps now.

Rising Pressure

For years, industry stakeholders—borrowers, lenders, developers, and regulators—have been anticipating a wave of loan maturities, wondering how the market would manage the financial strain. 

Moody’s data suggests that many banks have responded by modifying loans to help borrowers deal with increased debt service costs, likely due to variable-rate loans and the need for refinancing.

The report focused on banks with more than $100B in assets and CRE to tangible common equity ratios above 150%. Among these institutions, the range of loan modifications varied, with some offering none while others saw modifications exceed 2%.

Deflated Hope

The surge in loan modifications comes despite earlier market predictions that the Federal Reserve would initiate rate cuts in early 2024. Futures markets had expected cuts to begin as early as March, which would have alleviated some financial pressure on borrowers. 

However, the first rate cut did not occur until September, leaving borrowers to face months of higher-than-anticipated rates.

As a result, banks—particularly those with significant CRE loan concentrations—are seeing higher credit risk, especially in office properties, where borrowers are struggling to meet debt obligations.

Team Extensions, Payment Referrals

Term extensions have been the most common form of modification in 2023 and 2024, followed by payment deferrals. According to Moody’s, these adjustments primarily address payment timing rather than changing principal amounts or interest rates, providing short-term relief for borrowers without altering the fundamental loan structure.

Banks with asset sizes ranging from $100B to $700B reported the highest median rates of modifications, and global investment banks saw the steepest YoY increase. 

Conversely, smaller banks with less than $100B in assets had the lowest rates of modification but also showed a higher concentration in CRE lending. Smaller banks typically have less exposure to high-risk sectors like large office towers, which Moody’s described as a “credit positive offset to concentration risks.”

Navigating Uncertainty

As borrowers and lenders brace for more loan maturities in the coming months, Moody’s report indicates that term extensions and payment deferrals will likely remain key tools in managing financial strain.

While the recent rate cut in September may offer some relief, the long-term outlook remains uncertain. Banks and borrowers alike will need to continue adapting as the maturity wall approaches.

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