Since rising interest rates spun many CRE loans into a desperate need for refinancing, borrowers and banks have been juggling conditions through an extend-and-pretend strategy. Just when a loan might move into default and cause a problem for both parties, terms get renegotiated to avoid the dilemma.
A new Gray Capital research brief, focusing mostly on multifamily, said that “extend and pretend is coming to an end as lenders and equity are growing impatient with borrowers.” Instead of fixing problems, the approach has kicked the can down the road. Too many borrowers have yet to raise the extra capital they need or find other financing to pay off their existing loans. Lenders and equity holders are looking for an end to holding what is now a risky liability. There is also only so long a company can hold a debt without writing it down.
There are multiple criticisms of extend-and-pretend. The Federal Reserve Bank of New York's attempt to plaster over problems and wait for a favorable rate change isn't broadly helpful. Instead, a report from the staff argued the extend-and-pretend process led to increased financial pressure on banks.
Big banks have started to offload portions of commercial real estate portfolios to avoid losses when office property owners can't pay off mortgages. They are doing so quietly to prevent attention to the market value of their portfolios.
Part of the Gray analysis was based on the New York Fed’s research with multifamily-specific data from CoStar. It estimated that, for CRE as a whole, a new wave of loan maturities could peak in 2026. Multifamily specifically could spike in the third quarter of 2025.
Another part of the analysis is Gray’s projection that the Fed will lower the federal funds rate more slowly than the jumps in 2022. “ Elevated rates will continue to put pressure on borrowers facing loan maturities, particularly those with bridge loans or construction loans that have already been extended,” it wrote.
The report did project an improving market in multifamily in a number of ways. Gray quoted data from CoStar. Multifamily unit prices have been moving up to about $200,000, well up from a low of maybe $175,000 in mid-2023. Cap rates have risen from about 4.25% in early 2022 to 5.5% in 2024, but CoStar estimated that they will trail downward over the next few years.
The estimate of loan maturities in 2025 Q3 from CoStar is 25% larger than the firm’s 2023 projection. Additionally, multifamily deliveries are starting to decrease after the historical levels of construction in 2023 and 2024. Plus, starts have dropped dramatically. The result is a leveling of supply. The combination of conditions means an elevation of distressed investment opportunities.