Are Banks really extending office loans?
The “maturity wall” for commercial real estate loans has grown both taller and delayed in its approach.
The growth rate of commercial real estate loans extended by banks is now quite rapid. Data from the Federal Reserve shows that they increased 1.2% sequentially on a seasonally adjusted basis in the first quarter of 2024. Last year, growth slowed to 0.3% in the fourth quarter, but this put an end to that.
Commercial real estate investors are preparing for a slew of debt maturities that might put landlords in a difficult position, where they must decide whether to restructure their loans or write them off entirely due to low occupancy and rental prices.
However, last year’s results were less than anticipated. There was no refinancing or sale of the underlying property involving $214 billion in mortgages due in 2023, according to a recent research by MSCI Real Assets. Based on their analysis, MSCI Real Assets has concluded that the maturity dates of these loans have been temporarily extended.
This practice, which naysayers frequently call “extend and pretend,” has greatly increased banks’ maturities by 2024. A recent analysis by PGIM Real Estate, an arm of Prudential Financial’s asset-management division, highlighted a 35% increase over earlier projections on the commercial real-estate maturities anticipated by banks in 2024.
There was a significant dip in the number of new commercial mortgage deals originating last year, but banks are still able to meet their lending responsibilities due to longer-standing loans and projects that are still in the planning stages.
According to a recent research by Autonomous Research, there is no place for maturing loans because existing obligations maintain funding levels high. Approximately 40% of the commercial real estate loans that are due to mature this year are actually ones that were intended to mature in 2023, according to their estimates.
Here we have both good news and unpleasant news. One the one hand, losses have solidified and debts are not being wiped off. However, neither of these issues is being addressed or rectified. This problem persists, and investors are still left guessing as to whether or not the loans will turn out the way the banks are hoping.
As of the most recent report, large banks monitored by Autonomous have set aside 8% of the total value of their office portfolio loans as a loss reserve. That amounts to almost five times the average allocation for all loans put together.
Following March’s 8% gain in the KBW Nasdaq Bank Index, the continued strength of bank stock prices will be heavily dependent on the amount of safety net investors need. But investors are left with limited information. Difficulty with commercial mortgages may not always appear as late payments. “Balloon” payments, in which the majority of the principle is payable upon maturity, are a common structure for commercial real estate loans.
According to Fed data, the rate of delinquencies on banks’ CRE loans climbed to 1.2% as of the fourth quarter of 2023—still far lower than the 8%+ rate that was reached in the aftermath of the 2008 financial crisis.
On the other hand, when they come due or when developers look for permanent funding from another lender—typically one that isn’t a bank—a major strategy for banks to deal with them is to refinancing them with fresh loans.
Therefore, pushing out maturities can be the correct solution, even though it may be unsatisfactory. One positive development is that interest rates are expected to decline. This could be good news for landlords who are now facing difficulties in raising rents to cover their mortgage payments at the current high rates.
Furthermore, it seems that lenders looking to capitalize on opportunities and bargain hunters are getting set to ratchet up their game. According to PGIM Real Estate’s research, “increasing role for alternative lenders” is a possibility. If new regulations require banks to be more careful with their capital and risk levels, this could happen more often.
No one enjoys the waiting game more than investors. The banks may have made their best move for the time being.
