Commercial Real Estate Defaults Incoming in 2024? The Billion Dollar Dance

In a recent piece covering commercial real estate defaults in 2024 and beyond, real estate-focused financial news site “The Real Deal” brings us the stories of several lenders facing a situation that would have been unthinkable during the CRE boom years– large-scale commercial real estate defaults in 2023, with no signs of stopping in 2024, with some analysts even predicting the office sector remaining in a downturn until the early 2040s.

Office Values to Drop 35% by late 2025, Recovery Unlikely Before 2040, Capital Economics Forecasts


Looking for commercial real estate rates? Head to the live Finance Lobby commercial rate calculator, here.

However, there is always some opportunity in chaos. In a climate where commercial real estate defaults are a common sight, Vornado Realty Trust has found a way to navigate the financial precipice. Earlier this year, the company was faced with the daunting task of refinancing the retail segment of the St. Regis Hotel, which proved unsuccessful leading to a default on a staggering $450 million loan.

Crédit Agricole Chooses a Different Path

Their lender, Crédit Agricole, known for its significant presence in the commercial real estate loans market, chose a surprising path. Instead of sounding the alarm bells, the bank provided Vornado and its partners with a five-year loan extension in return for a substantial down payment on the principal.

This tactic is becoming increasingly popular among commercial real estate owners and lenders as they confront the commercial real estate market’s looming $1.5 trillion in commercial maturities.

Through this approach, banks and CMBS special servicers, such as Brighton Capital Advisors, can sidestep the complex process of property foreclosure. Meanwhile, commercial property owners, despite the higher interest rates, buy themselves more time to fight another financial day.

Will “zombie buildings” create a commercial real estate “death spiral?”

CRE loan extensions typically don’t come cheap.

However, this is not a straightforward solution, as Michael Cohen, head of Brighton Capital Advisors, points out in the TRD piece. The cost of securing an extension is considerable, and property owners must be ready to face significant financial hits.

This trend has been gaining traction in the commercial real estate sector, as evidenced by GFP Real Estate’s $120 million loan extension for the DuMont Building and Tishman Speyer’s recent extension of its $485 million mortgage for a Park Avenue office building.

Lenders’ strategies vary: some are quick to reclaim properties, while others adopt a longer-term view, hoping for improved debt management and a friendlier refinancing market down the line. However, there is an impending concern of a worsening office market, which could lead to banks repossessing properties in the future.

The context echoes the aftermath of the previous financial crisis, with the “extend and pretend” method being invoked. Unlike the past though, current extensions involve principal reductions and reserve augmentations, shifting them closer to restructuring deals.

For instance, the owners of the St. Regis retail property, including Vornado, Crown Acquisitions, and the Qatar Investment Authority, agreed to a $95 million payment, bringing their balance down to $355 million. Other cases, like at the Seagram Building, saw agreements to pay down principal amounts over time.

Federal Regulators Revise Commercial Real Estate Loan Accommodations and Workouts Policy in FDIC 2023 Policy Statement

Commercial real estate loan modifications are difficult- but not impossible.

While loan modifications can be challenging, particularly for commercial mortgage-backed securities (CMBS), they are not impossible. With a combination of principal down payments and equity contributions to reserve funds, real estate firms are managing to prolong their loan lives, albeit at a cost.

The future of the commercial real estate market remains uncertain, as many factors like remote work, retail property decline, and the possible intervention of the Federal Reserve loom large. However, through strategic planning and nimble negotiations, property owners like Vornado Realty Trust and GFP Real Estate are charting a course through this tumultuous sea, revealing new paths in the face of the commercial real estate default challenge.

July 2, 2023