Some Lenders opt to Play a Waiting Game Instead of Foreclosing

According to a recently released report, about $300 billion worth of commercial real estate loans were extended in 2023, as some lenders chose to give debt-ridden borrowers a loan extension instead of foreclosing and taking control of the property. However, the volume of loans due to mature this year has increased to more than $900 billion as a result. A cited example is Herald Center, a 250,000-square-foot building the spans the entire 6th Avenue block-front between West 33rd and 34th Streets. The appraised value of the property was lowered from $572 million to $276 million in March, after the $255 million loan encumbering the property was sent to special servicing. Decisions by the lenders to extend the mortgage by one year may have been because the loan amount remains below the reduced appraised value. In addition, although the building is reportedly almost half vacant, retailer H&M, which occupies about a quarter of the building under a lease that extends through 2041, pays two-thirds of the rent. “Confronted by a massive wave of troubled office loans,” lenders hope that extensions will provide sufficient time for cash flow to improve either from better leasing volume, or a cut to interest rates by the Fed that will lower borrowing costs. It is expected that the trend to extend will continue, with many of the 2024 maturities being extended into 2025. Although banks have set aside $100 billion to protect against eventual losses, it could be concluded by the Fed that creditworthy businesses aren’t getting the capital they need because “so much money is tied up in dud real estate loans,” which at some time in the future could prompt regulators to “force banks to purge their balance sheets, a painful  prospect last seen after the savings-and-loan crisis in the early 1990s.”