Banks are opting to mend, not end, their relationships with commercial real-estate borrowers.
Modified CRE loans on U.S. bank balance sheets surged to $27.7 billion by mid-2025 from $16.7 billion a year earlier, per St. Louis Fed data—a 66% leap that underscores widening stress but disciplined management. The trend marks a pivot from crisis containment to capital preservation: lenders are extending maturities, trimming rates, and giving borrowers time to rebuild cash flow rather than triggering defaults. It’s a nationwide “extend-and-pretend” phase—organized, not panicked.

Office debt sits at the center of the storm. Vacancies above 20% nationally and refinancing gaps of 300–400 bps versus origination coupons leave many loans underwater.
Hotels follow, with uneven post-pandemic recoveries prompting second-round workouts. Retail loans—especially older malls and high-street assets—add to the load, while multifamily and industrial remain relatively insulated. In practice, about half of all bank CRE modifications now involve office collateral.
As one regional credit officer put it: “Foreclosing an office tower doesn’t create value—time might.”

Mid-sized and community banks carry the lion’s share of restructured credits because they dominate local office lending. These banks often hold 30–40% of portfolios in CRE, leaving limited headroom for losses.
Rather than crystallize write-downs, many are bundling and selling modified notes at discounts to private-equity distress funds. Larger institutions are boosting loan-loss reserves—typically by 25–40 bps of CRE exposure—to absorb eventual hits.
Meanwhile, regulators’ post-2023 guidance allows banks to avoid immediate loss recognition on modified loans, provided reserves are adequate. That accounting relief is shaping behavior as much as credit fundamentals.

Capital markets tell a parallel story. Through Q3 2025, private-label CMBS issuance rose 25% YoY to about $90.9 B, led by single-asset deals for high-grade sponsors. Yet conduit volumes remain weak. This bifurcation—liquidity for top-tier borrowers, scarcity for secondary assets—forces banks to bridge refinancing gaps.
At origination rates near 3%–4% and today’s at 6%–7%, many 2018-2020 loans no longer meet debt-service coverage thresholds. Loan extensions effectively reprice time while avoiding fire-sale optics. For capital markets desks, it’s a managed slowdown rather than seizure.

Not all modifications are lifelines; some are rehearsals for loss. Roughly one in eight modified loans is already failing its new terms, regulators say. Banks respond with stricter covenants—interest reserves of six to twelve months, cash-sweep triggers, or partial paydowns.
Investors underwriting modified paper now add +200 bps credit spread and haircut valuations by 50–100 bps in cap-rate terms. Analysts estimate effective LTVs often exceed 100% on true-market value. Nonetheless, structured extensions can outperform forced sales if fundamentals stabilize.

For borrowers, modification means breathing room, not absolution.
A downtown-office operator described renegotiating a two-year extension and temporary rate cut after losing a key tenant: “It’s relief—but the clock’s ticking. We’re leasing hard, cutting costs, sending monthly reports. The bank’s a partner now, but patience has terms.”
Such human mechanics define this cycle: pragmatic cooperation over punitive foreclosure, at least for now.

The modification wave is set to crest through 2026 as the bulk of maturities arrive. If the Fed delivers another 100 bps of rate cuts over 2025–26, many extended loans could refinance out cleanly. A softer landing would validate the strategy.
If not, defaults deferred could become defaults realized by 2027. Regulators appear comfortable with patience so long as reserves rise in tandem. For lenders, that means protecting capital ratios while sustaining credit to functioning borrowers. For opportunistic investors, the next year offers a window to buy discounted notes before resolution accelerates.
Either way, the discipline of transparency—not the speed of liquidation—will define who survives the cycle.

CRE360 Mode B v7 — Distressed Capital | U.S. National Signal