Why 2025 Marks The Beginning Of The End Of Extend-And-Pretend

Only 11% of the $755M in office CMBS loans that matured in September were paid off, with roughly half of the remaining debt securing extensions from special servicers.  

It was a paltry payoff rate even compared to the 31% rate for the year through September, according to Moody’s. And it was a sign of the times.  

Property owners are avoiding transacting in today’s market, instead carrying forward the year’s dominant strategy of securing short-term extensions and other loan modifications as both sponsors and lenders wait for capital conditions to improve. 

The widespread practice, commonly referred to as extend-and-pretend, is available today for the owners of the highest-quality assets that can afford to pay the fees to wait for better days, but time is wearing thin for everyone else. For many asset holders, that means the pretending could come to an end in 2025.

“Even institutional, great household names have hit the end of their rope,” said Glenn Grimaldi, CEO of Naftali Credit Partners and the former head of U.S. commercial real estate finance at HSBC. “It's not just them, it takes two to tango. The bank is hitting the end of its rope too, it's ready to take the asset back.” 

Owners of performing assets with a loan maturity coming due have been able to avoid forced sales by using a mix of added equity and adjusted loan terms, but lenders have become less likely to push out a term for struggling assets. 

The shift in sentiment is already bearing out in the market, with more transactions exposing sellers to large losses. Across the country in 2023, only two properties traded at spreads wider than $100M from their previous sale price, according to Moody’s. Seven such transactions closed between April and August this year. 

“There is maybe a sign of capitulation for lenders on distressed properties where they're saying they're going to throw in the towel,” said Matt Reidy, a director covering real estate at Moody’s Analytics. “They're saying, ‘We can't continue to feed this’ or we just need to take our lumps.”

Office CMBS loan delinquencies accelerated in recent months. The 11.2% office delinquency rate in November is three times higher than at the start of 2023, helping to push the delinquency rate for all assets to 7.4%. 

The market is expected to get worse, although Moody’s projects office delinquencies will moderate after peaking above 14% in 2025. Multifamily properties, squeezed by increased operating costs and declining rent growth, have also seen delinquency rates tick up significantly since August and are expected to contribute to loan more modifications in the new year.

“I see delinquencies rising. It's been driven by office, and it'll continue to be driven by office,” Trepp Chief Economist Rachel Szymanski said. “But it's also important to keep in mind that we're seeing increases in multifamily delinquencies, and we might expect to see a continuation of that trend. I don't think it's fully hit a peak yet.”

While there’s a sense that lenders are losing patience on debt for some assets, they also have an incentive to avoid selling into today’s market because of the assumption that valuations are at or near their bottom. 

“We've seen transaction volumes level off and start to increase again, and that was one of the big reasons for extend-and-pretend, you didn’t want to be a forced seller in a low-liquidity environment,” Reidy said.

Buying time for higher valuations helps the bank avoid realizing losses. For assets that have strong fundamentals, there’s no shortage of private capital looking to help carry both the landlord and the lender over the hump. But the equity doesn’t come cheap.

“I left a gigantic bank to go into this space because this is where the next wave of liquidity is coming from,” Grimaldi at Naftali Credit Partners said. 

“There's plenty of private equity and private cash coming in,” he said. “The returns that private equity and private credit are getting now look like equity returns at senior debt levels. That's the pitch that I've made to my investors, and we're about to finish up raising $300M.” 

Commercial real estate debt is a much more popular investment today than actual real estate. Even large banks, which have pulled back from direct lending in the face of regulatory scrutiny of their loan books, have leveraged private equity firms as vehicles to invest their capital into real estate-related assets. 

Investing in the debt rather than the asset helps to avoid some downside risk, said Rob Gilman, who leads the accounting firm Anchin's real estate group.

“There's a lot more work that's being put in on the valuation side of these debt funds to understand what they're buying and what their exposure is going to be,” he said.

The strategy differs from the popular tactic taken during the Global Financial Crisis, Gilman said, when lenders were frequently providing capital under the assumption that the asset would eventually end up in their hands, referred to at the time as loan-to-own. 

That new capital is necessary for most landlords to secure short-term extensions or loan modifications in today’s market, with lenders demanding more concessions from sponsors to unlock new terms. 

“The deal's not getting done without it,” Gilman said. “But on [the lender’s] end, they're making sure that they get a preferred return, and [the loan] is being structured so that they get the first dollars out.”

At the start of the year, when interest rates were expected to come down at a relatively rapid clip, lenders had more of an appetite to extend a lifeline to properties. But as the market settles into the higher-for-longer reality most analysts see ahead, lenders see less of a reason to wait. 

The result will be more properties trading for steep discounts on past purchase prices, Grimaldi said. 

“People will lose some money, they're not going to wait to transact forever on a property that doesn't make any sense. And I think that's healthy and normal,” he said. 

The backlog of troubled properties sitting on lenders’ books has created greater fragility in the financial system, according to the Federal Reserve Bank of New York. Extend-and-pretend strategies have effectively stacked maturities into future years where there’s no certainty that capital conditions will be any better. 

The New York Fed warned in a report that the capital markets were only increasing the likelihood of a large and sudden capital hit as more loans past their maturity date are stacked onto future years. The focus on finding solutions for existing debt has also weakened new debt origination, Szymanski said. 

“These strategies also have been shown to reduce originations towards other CRE lending, so it's not only pushing the can down the road but it's also limiting capital going to perhaps more profitable projects,” she said. 

What extend-and-pretend strategies have done is avoid a true capital shock for now.

Some investors have declared that now is the best time in the last 15 years to enter the real estate market. The CMBS market saw a 154% increase in loan origination for the first half of the year compared to the same period in 2023, and there's a tremendous amount of sidelined capital that has been waiting to pick up assets should they eventually come to market.  

“You will see some distress [in 2025], but you're going to see a continuation of the stress, and the alternate sources of capital will take up the slack where the banks are not actually wading back into the space,” Grimaldi said.