CRE Loan Modifications Jumped in 2023
That’s at least with loans when someone can tell from the outside. The number are likely larger.
It’s seemed at least potentially true, if not obviously clear, since last year that there well could have been secret distress. By the fall, experienced people on the lending and borrowing sides noted that some amount of distress was being handled privately with a strong helping of embarrassment. No one in business wants to be viewed as being in trouble.
That’s not just the borrowers but the lenders. Bad deals add an aroma of decay to a balance sheet, where a state of federal regulator, an investor, or even CPA or accountant might raise a concern or two. One of the ways a lender keeps something looking feasible is by modifying the loan. Changing details, extending the term, all of it can make room to cure any problem — or at least push things off to another day.
When it comes to kicking the can down the road, there seems to have been a spike of it last year in the form of loan modifications, according to CRED iQ. The totals covered 441 loans with total value of $13.6 billion.
While not a complete overview, CRED iQ analyzed all modifications that occurred in 2023 within the securitized universe, including all CMBS, CRE CLO, SASB, Fannie Mae, Freddie Mac, and Ginnie Mae.
A couple of caveats. What CRED iQ examined doesn’t cover all CRE loans as commercial banks hold a huge portion and the details of all those are invisible. They might see the same portion of problems, or less or even more. Also, what percentage were the 441 loans out of all of them?
It’s still useful information. The highest volume of modifications occurred in the second quarter of the year, according to the firm. Single Borrower Large Loan (SBLL) deals represented almost half of the modifications, followed by CRE CLO deals. Office ($4.6B) and multifamily ($3.3B) loans were modified the most in 2023.
Another indication of the scale is a comparison of what happened last year compared to 2022 — the volume almost doubled. The most popular modification was an extension of the term. CRED iQ estimates that maturity extensions will continue their popularity in 2024 with another $209.6 billion in loans will mature.
Some of the largest loan modifications included a maturity extension of one year on the $782.8 million loan secured by the 831,000-sf office building at 375 Park Avenue. The 2.8 million square foot Aon Center in Chicago backs a $536.0 million loan. The change is a three-year extension without a change in the interest rate. And a 563-unit multifamily building in Los Angeles has a $219.6 million loan. One modification in May changed the loan from LIBOR to SOFR (something that may just have to do with maintaining a variable interest rate loan switching the base). Another in September extended the one-year maturity from March 2025 to March 2026.