Banks' "Extend and Pretend" Strategy Boosts CRE Loans to 1.2% Growth

Banks extend CRE loan maturities into 2024, navigating uncertain markets with synthetic risk transfers and increased loan-loss reserves.

By Barry Stearns

4/4, 09:32 EDT
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Key Takeaway

  • Banks are extending commercial real-estate loans due in 2023 to 2024, accelerating loan growth to 1.2% in Q1 2024.
  • Critics label this strategy "extend and pretend," increasing the risk and volume of loans maturing in 2024.
  • Despite low delinquency rates at 1.2%, banks have set aside reserves worth about 8% for office portfolios, indicating caution.

CRE Loan Maturities Extended

The commercial real estate (CRE) loan market has seen a significant shift, with many 2023 maturities being pushed into 2024, giving lenders and investors more breathing room amidst fluctuating interest rates. This extension has resulted in a growing "maturity wall," with banks' CRE loans accelerating at a 1.2% growth rate in the first quarter of 2024, a notable increase from the 0.3% growth in the last quarter of 2023. This resurgence ends a period of slowdown and signals a potentially challenging landscape ahead as the volume of loans coming due increases.

Banks Navigate Uncertain Waters

The strategy of extending loan maturities, often referred to as "extend and pretend," has added complexity to the banking sector's outlook. Autonomous Research analysts estimate that about 40% of the CRE loans maturing in 2024 were initially due in 2023, highlighting the scale of extensions. This maneuver helps avoid immediate losses but also postpones the resolution of potentially non-performing loans. Large banks have prepared by setting aside significant loan-loss reserves, with allowances for office portfolios at roughly eight times the median level across all loans. This cautious approach reflects the uncertainty in the CRE market, particularly as delinquency rates on CRE loans remain low at 1.2% as of the fourth quarter of 2023, suggesting that the real challenge lies in the refinancing and maturity extension of these loans.

Synthetic Risk Transfers Emerge

In response to tightening regulations and the need to manage capital more efficiently, U.S. banks have increasingly turned to synthetic risk transfers. This strategy involves selling risk to hedge funds and private-equity firms, allowing banks to alleviate capital charges without fully divesting from underlying assets. JPMorgan Chase, for example, has been active in this area, working on deals to reduce capital charges on approximately $25 billion of its loan portfolio. These transactions, while costly, offer a way for banks to navigate the regulatory landscape and maintain lending activity, especially in the CRE sector.

Early Movers Capitalize on Property Market

The downturn in commercial property values, which have fallen 21% on average since the Federal Reserve began raising interest rates, presents opportunities for early movers. Private investors, including high-net-worth individuals and family offices, have been particularly active, capitalizing on the market downturn to secure deals. This trend underscores the advantage of agility and long-term investment horizons in navigating the current real estate market. Institutional investors, on the other hand, have been more cautious, partly due to existing high-price acquisitions and liquidity tied up in private equity assets.

Street Views

  • MSCI Real Assets (Neutral on commercial real estate loans):

    "We believe that these loans have been granted some short-term extension to their maturity date."

  • Autonomous Research analysts (Neutral on banks' CRE loan strategies):

    "Existing commitments keep funding up, and maturing loans have nowhere to go."