Extend-and-pretend trend Will Continue Into 2025

Last month, RFR’s 17 State Street was in hot water.

Special servicer Rialto Capital Advisors had filed to foreclose on the FiDi office building after RFR’s Aby Rosen and Michael Fuchs defaulted on its $180 million mortgage. The 10-year CMBS loan had come due in August, and RFR hadn’t found fresh financing — a struggle driving many defaults these days.

Still, an RFR spokesperson said the firm was optimistic, telling Crain’s it would hold on to the asset.

Last week, RFR nabbed a three-year extension on 17 State, plus five more years to pay off a loan tied to 150 East 72nd Street, a boutique retail property on the Upper East Side, the firm announced.

“RFR’s commitment to holding our prized properties has never wavered,” Rosen said in a statement.

The workouts are just two examples of the extensions lenders and special servicers are doling out at record rates nearly three years into the commercial real estate downturn.

Modifications of securitized loans hit a fresh high in 2024, topping $19 billion and the previous record of $18.3 billion set in 2020, according to a recent analysis by commercial real estate analytics firm CRED iQ.

December saw the most workouts of any month last year.

The thrust of the extend-and-pretend strategy is that interest rates, eventually, come down, and property owners can get a new mortgage.

The industry has been holding out hope for over a year. But so far, cuts haven’t made a dent — The Fed dropped rates by 1 percentage point over the past year following a full 5 point run up.

And the outlook for rates is hazy at best and gloomy at worst.

Markets are pricing in a pause for the Fed’s Jan. 29 meeting that some project will run through spring. President Donald Trump recently promised to “demand that interest rates drop immediately,” according to Reuters. But that’s bluster. Trump can stomp his feet but the Fed doesn’t have to listen.

Economists say what’s more likely is that Trump’s proposed tariffs, if they go through, spur inflation that would move Fed Chair Jay Powell to pause cuts for a longer period or, if prices really heat up, start hiking.

A pause or hike is bad news for lenders.

But sources familiar with the workout space say most lenders aren’t playing Nostradomus when they’re pushing out due dates. They’re considering the immediate choice before them: take a loss or delay and pray — another singsong catchphrase for term extensions.

In the short-term, many are deciding kicking the can is the better move.

A good number of the high-dollar deals to notch modifications in recent months have also had solid fundamentals, a confidence boost for lenders.

Take RFR’s 17 State Street. The financials sing. Occupancy as of last summer hung at 95 percent and revenue covered 3.64 times debt service, a ratio showing peak health, according to Morningstar Credit data.

The issue was the refinancing, itself. Rosen and Fuchs had been paying a fixed rate of 4.45 percent since 2014 when the loan was made. Current borrowing rates for commercial buildings are 7 percent, minimum, according to mortgage consultant Select Commercial Funding.

The extension creates a runway for that rate to come down. And RFR threw in more equity to close the deal, a spokesperson said.

SL Green is another recent winner of the extend-and-pretend trend. The firm locked down a three-year extension on the $740 million loan tied to 1515 Broadway, a Times Square office building it hopes to redevelop as a casino, a few weeks after the loan went to special servicing for imminent maturity default.

SL Green’s Marc Holliday, much like Rosen, had been paying a fixed-rate of 3.9 percent since 2013, and the modification let the landlord keep that rate for three more years. The property is also in good shape. The building is fully occupied and net cash flow is covering 1.85 times mortgage payments, according to Morningstar.

Some have predicted that extend-and-pretend would eventually turn to extend-and-resolve as lenders could no longer kick the can.

But so far, modifications are still the name of the game.

Fitch in a recent forecast said it expects modifications to tick higher in 2025. Maturity defaults are set to rise, as well.