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  • Writer's pictureRealFacts Editorial Team

Loan Modifications Nearly Double in 12 Months

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The landscape of commercial real estate finance is undergoing significant changes, as evidenced by a notable surge in loan modifications. According to recent data from CRED iQ, the volume of loan modifications has nearly doubled in the past 12 months, signaling a dynamic shift in lender strategies and market conditions. By the end of May 2024, approximately $22 billion in loans had been modified, with $9 billion of these modifications occurring within the current year alone. This trend points towards a record-setting year for loan modifications, surpassing the previous high of $16.8 billion in 2023.

Factors Driving the Increase in Loan Modifications

Several factors contribute to the increase in loan modifications. Economic uncertainty and changing market dynamics are prompting lenders and borrowers to renegotiate loan terms to avoid defaults and mitigate losses. The "extend and pretend" strategy, where lenders extend loan maturities in hopes of better future market conditions, remains prevalent despite some large banks offloading portions of their commercial real estate portfolios to avoid potential losses.

CRED iQ's data reveals that nearly half (46.2%) of the loan modifications fall into the Maturity Date Extension category. This modification allows borrowers more time to stabilize their financial situations and refinance or repay their loans under more favorable conditions. 

Dominant Loan Types in Modifications

Commercial Real Estate Collateralized Loan Obligations (CRE CLOs) dominate the modification landscape among the various loan types. Year-to-date, CRE CLO loans account for $4 billion, or 44% of all modifications in 2024. The Single-Borrower Large Loan (SBLL) securitizations follow closely, with $3.3 billion (36.4%) in modifications, while conduit loans contribute $1.6 billion (17.4%).

These modifications indicate lenders' willingness to work with borrowers in maintaining loan performance and preserving asset values. For instance, agency loans, CMBS conduit trusts, and SBLL securitizations are on track to match their 2023 modification activities, while CRE CLOs are expected to surpass their previous records.

Notable Examples of Loan Modifications

1. Phoenix Corporate Tower: This 457,878-square-foot office building, backing a $33.7 million loan (originally $38.0 million), underwent a modification in April 2024, extending the maturity date to July 2025. The property was appraised at $42.5 million in February 2019 in Phoenix's Central Corridor submarket. As of March 2024, it had a debt service coverage ratio (DSCR) of 0.83 and an occupancy rate of 78.0%.

2. Retreat at Riverside: This 412-unit multifamily property in Atlanta secured a $63.9 million loan, which was modified in May 2024, extending its maturity date to July 2024. The property, appraised at $81.3 million in February 2021, had a 93.4% occupancy rate and a DSCR of 0.78 as of March 2024. Life safety issues and upcoming maturity had placed this loan on the servicer's watchlist since June 2023.

Implications for the Market

The rise in loan modifications reflects the broader economic adjustments and market trends. By extending loan maturities and adjusting terms, lenders are providing borrowers with the flexibility to navigate uncertain economic conditions. This approach helps maintain stability in the commercial real estate market, preventing a potential surge in loan defaults and foreclosures.

For investors, understanding the dynamics of loan modifications is crucial. These modifications can offer insights into the financial health of borrowers and the willingness of lenders to support long-term asset stability. As the market continues to evolve, staying informed about these trends can help investors make strategic decisions and capitalize on opportunities within the commercial real estate sector.


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