REAL ESTATE NEWS

Extend-and-pretend in CRE lending has been a growing problem, surging to $35.5 billion amid rising defaults, according to a recent CRED iQ analysis.

Now, a new analysis from CBRE shows that for office specifically, extend-and-pretend has masked a serious office debt-funding gap — $131 billion over the next four years. This is nearly 25% of all office debt originated between 2017 and 2023 and coming due between 2025 and 2028.

Determining an estimate of the gap was difficult as lender forbearance over the last two years complicated the calculation of current debt-funding gaps. But CBRE put together a series of data sources that let them calculate an estimate.

They started with the Mortgage Bankers Association original summation report without intermediary lending to get a baseline of office loans for each year. Then they divided the annual volumes by the average office loan-to-value — calculated with a data set of loans closed or brokered by CBRE so they had the information — to get the best possible set of property values.

CBRE Econometric Advisors used a baseline value index for a hypothetical value five years after origination, then multiplied the figures by assumed future LTV to determine debt. Then CBRE assumed a 25-year amortization schedule at 3.5% interest to estimate the percentage of outstanding debt. Finally, they subtracted available debt from the assumed outstanding debt.

Class B and C properties raised a particular problem because calculating distress has been a problem. “We expect to see more distressed assets come on the market as lenders grow weary of extending delinquent loans," CBRE wrote. Previous GlobeSt.com reporting adds a complication as funds have been increasingly pressured to deploy the capital that they raised. Banks selling CRE loan portfolios have been able to limit discounts to 5% to 10%. Property owners might find the same conditions helping them, as many funds have to invest, likely pushing offers upward. Office assets form a special category with more complications and Class B and C buildings would probably not see such protection.

This type of analysis is interesting and suggests an ongoing look at the future of markets. It could also be used by investors to project future values of potential target properties at approximate timelines to see whether any might be under more pricing pressure for negotiation purposes.

Source: GlobeSt/ALM