Loan Workouts Are Surging This Year
Even as the countdown to the Federal Reserve announcing the size of the first interest rate cut continues into the early afternoon, there's a second one. Longer and in the world of commercial real estate, with greater immediate impact — and that is, what is happening with troubled loan workout strategies.
Longer because this will continue for some time. Greater impact because the results might help decide which properties — which companies and investors — might have a chance of financial survival for enough time to eventually take advantage of whatever lower interest rates will be available for refinancing.
CRED iQ has again examined trends in workouts and resolutions for CRE securitized loans — CMBS, SBLL, CRE CLO, and Freddie loans — between January (with $64.3 billion across 5,488 loans) and August ($156.2 billion across 6,351 loans) in 2024. The top four workout strategies were successful resolution, foreclosure, loan modification, and real estate ownership (REO, meaning returned to the lender).
The easiest and fastest comparison is the average loan size. In January it was $11,716,472 per loan; August saw $24,594,552 per loan. The loan value more than doubled.
The full payoff, a form of successful resolution, grew wildly from less than $1 billion in January to $11 billion in August. That was an increase of 1,548.3% over the period. The average per loan in August would come out to 447, although chances are the number of loans paid off was different. Larger actual values would reduce the number and smaller values with increase it.
Foreclosures also grew at a brisk pace, although not as fast, reaching $19.2 billion in August, or an increase of 272.6%. The REO category increased by 22% from January to August.
Modifications include modifications and maturity extensions. This is the so-called extend-and-pretend (or delay-and-pray for some of the more skeptical) category, where lenders try to put off a final decision and keep a potential write-down from their balance sheets. The total rose 326.9% to $16.7 billion in August.
"Considering that resolved loans nearly doubled in the period (92.3%) to $55.9 billion while the full payoff category saw such explosive growth (1,548.3%) to $11 billion, there are positive trends represented in this analysis," CRED iQ wrote.
They gave as an example of a "notable workout" the 468,926 square-foot Coastland Center, a Naples, Florida regional mall built in 1977, renovated in 2007, and backed by a $96.0 million conduit loan that transferred to special servicing in July 2024 because of an August 2024 maturity date. A forbearance agreement extended the maturity date to May 2025.
Appraised for $233 million in October 2012, the value was down by 66.8% in February 2024 when it was appraised at $77.4 million. In March 2024, the DSCR was 1.14 and there was 96.0% occupancy.
Source: GlobeSt/ALM