The CRE Tsunami has now come ashore, causing valuations to decline significantly, demand to disappear, and credit availability to dry up. $2T of CRE loans are now maturing over the next three years (MBA), and “double defaults” in CRE property loans have hit a decade high, indicating increased stress in the CRE market and raising concerns regarding industry stability.
Total re-defaulted CRE loans surged to $5.5B in September, up 90% from the previous year. Regulators and analysts are closely scrutinizing the banking industry’s “Extend and Pretend” strategy of granting loan modifications to delay defaults.
This approach is masking deeper systemic risks as interest rates remain high and borrowers continue to face financial difficulties, particularly in the office and retail sectors. A recent New York Federal Reserve study cautioned this approach leads to “credit misallocation” and ultimately weakens financial stability. During the first nine months of 2024, the value of delinquent CRE loans rose by 25%, with modified loans re-defaulting at unprecedented levels.
In their October 2024 Staff Report, Extend and Pretend in the US CRE Market, NY Fed Researchers concluded that:
“Banks have extended and pretended their distressed CRE mortgages in the post-pandemic period to delay the recognition of losses. Banks with weaker marked-to-market capital, largely due to losses in their securities portfolio since Q1/2022, have extended the maturity of their impaired CRE mortgages and pretended that such credit provision was not as distressed to avoid further depleting capital."
The limited number of loan defaults has hindered the reallocation of capital, crowding out the origination of both CRE mortgages and loans to firms. The maturity extensions granted by banks have fueled the volume of CRE mortgages set to mature in the near term—a “Maturity Wall” with the associated risk of large losses materializing in a short period of time.
This expanding Maturity Wall led to a rapidly increasing volume of CRE loans set to mature in the near term.
As of Q4/2024:
Weakly capitalized banks drive this increase, consistent with extend and pretend behavior.
Overall, the Maturity Wall represents a sizable 16% of the aggregate CRE debt held by the banking sector as of Q4/2024.
For insights on recent trends, see our commentary on the New York Fed report in the Resources Section or White Paper Library.
Coming Next: The Maturity Wall Leads to the CRE Funding Gap