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As Era of "Extend & Pretend" Ends, More CRE Shopping Begins

Guest post by: Carl Moore

Article Overview: Bank "extend and pretend" strategies through 2008-2010 moved a glut of loan maturities to this year. As of year-end 2010, its forecasted more than $850 billion in commercial real estate loan maturities this year. And 2011 has produced a strong stream of newly delinquent loans on top of already significant increases in loan modification and liquidation activity.

As Era of "Extend & Pretend" Ends, More CRE Shopping Begins

As the "extend and pretend" period of the Great Recession wanes into a period of true loan modifications, lenders and note holders appear to be forcing more distressed loans into the marketplace. And in turn, institutional investors, who were disappointed in the relatively slim pickings available in the distressed markets after raising enormous sums targeted for acquisition in 2009 and 2010, seem to be back on the hunt for more opportunities in investment-grade commercial real estate.

According to the latest Commercial Repeat-Sale Indices, transaction activity increased 24% from 2,176 sale pairs in the first quarter of 2011 to 2,690 sale pairs in the second quarter of 2011. Investment grade transaction activity drove most of the increase. Noteworthy in the investment grade index is that the percent of distressed sales increased to 34% of the activity in June 2011 from 32.2% in May 2011.

Under such "extend and pretend" policies, lenders and servicers simply extended maturity dates as a way to wait out the Great Recession. Then in the second half of last year, the number of "true" modifications of principal and interest rate reductions began to make up an increased share of activity. This also opened the doors for banks to start releasing loans they did not want to modify back into the marketplace.

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Article Tags: construction financing, developers, Financing, loans, money



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