‘Extend and Pretend’ Fastest-Growing CRE Loan Workout Strategy

The CRED iQ research team zeroed in on workout strategies to explore trends and resolutions for commercial real estate  securitized loans so far in 2024. This analysis included the workout strategies across commercial mortgage-backed securities (CMBS), single-borrower large loans (SBLL), CRE collateralized loan obligations (CLOs) and Freddie Mac loans.

Building upon our September report, our analysis compared the special servicer’s workout strategies from January 2024 with October 2024. Our previous report explored the period of January 2024 to August 2024. Our most recent analysis compared workout strategies across $64.3 billion in loan balances (5,488 loans) in January of 2024 with $79.1 billion (6,169 loans) in October of 2024.  

The top four workout strategies used by special servicers from this dataset includes successful resolution, foreclosure, modification and real estate owned (REO). 

For 2024 year-to-date through October, the so-called “extend and pretend” strategy reigns supreme, notching the fastest growth rate of all workout strategies. Not surprisingly, loan modifications grew by 81.2 percent since January of this year.  

Foreclosures are not far behind, with growth in that category reaching 79.6 percent this year, for the second most common workout strategy. 

Full resolution (resolved) was by far the largest category by multiples, reaching $31.4 billion in October and seeing a 2024 category growth rate of 7.9 percent. .

Finally, REO, the fourth-largest category, crested over $5 billion in October, with a 13.3 percent growth rate versus January (ranking third in growth rates across the major workout reasons).  

Perhaps most notable across all categories was the 53.1 percent drop in full payoffs in October, compared to January. Just $312.1 million in loans saw full payoffs in October, versus $700 million in January.

Extensions also saw a decrease since January, albeit more modest at 15 percent.   

The fastest-growing strategies in this secondary category of Other Workout Reasons, were deed in lieu of foreclosure (80.7 percent increase), bankruptcy (68.6 percent increase) and note sale (62.2 percent increase).

Notable workout example

Chelsea Gardens, a 474-unit multifamily property in the Atlanta market, is backed by a $37.1 million CRE CLO loan. The loan transferred to the special servicer in October due to non-monetary default and is expected to undergo foreclosure as the workout strategy.  The loan fell 90 days delinquent in November. The loan is scheduled to mature in February 2025 with an extended maturity date of February 2026. 

Chelsea Gardens was appraised for $44.2 million ($93,249 per unit) at origination in December 2021. The value of the asset has increased to $55.1 million ($116,244 per unit in February 2024). The asset had a below breakeven debt service coverage ratio of 0.65 and was 82.7 percent occupied as of August. 

Mike Haas is the founder and CEO of CRED iQ.