Commercial Real Estate Double-Defaults Are on The Rise

A double-default is when a real estate borrower has trouble with their loan, either it is due and they are unable o refinance, or they can’t make the payments, and they do a work-out with the lender. The terms are adjusted, or the loan is extended, or other loan modifications so the lender doesn’t have to go through a formal foreclosure.  After a period of time the borrower gets into trouble again and the loan once again goes into default. According to Bisnow 11/8/24, “Banks have roughly $2T in commercial real estate loans, but the value of delinquent loans has increased by 25% to hit $26B in the first three quarters of 2024 — spelling potentially heightened difficulty in the near future. loan modifications shot up by 150% during 2023 from a year prior, with extensions being the most popular option, according to data from Credio published this spring.” This may be that the current interest rates are too high and have not come down, or as in the case in many regions with office buildings, employees are still working from home, and/or corporate downsizing has continued which keeps rental rates low and vacancy rates high. “Overall, “extend and pretend” loan modifications have resulted in banks being able to report new delinquencies slowing by 40% this year. Only around one third of modifications offered by banks over the past year have actually resulted in a double default, the FT reported.”