🚨Banks reported $27.7 billion in modified CRE loans in Q2 2025—a 66% YoY surge—as higher rates strain refinancing capacity [Source: St. Louis Fed]. With loan yields near 6.6–7%, many 2019–2021 vintages are no longer refinanceable at par. Lenders are responding with extensions and interest deferrals to avoid loss recognition. Though modifications still represent <1% of the $3 trillion CRE loan book, the acceleration signals rising stress ahead of 2025’s $957 billion maturity wall.
Modified CRE loan volume: $27.7 B (Q2 2025, +66% YoY) — [Source: St. Louis Fed].
Avg. CRE mortgage rate: 6.6% (YTD 2025, +270 bps since 2021) — [Source: Deloitte].
Share of banks tightening CRE lending: 9% (Jun 2025, down from 67% Apr 2023) — [Source: Fed Senior Loan Officer Survey via Deloitte].
2025 CRE debt maturing: ≈$957 B (+3% YoY) — [Source: MBA].
Loan Performance. Debt service coverage ratios are eroding as borrowing costs nearly double. Lenders prefer modifications over foreclosures to maintain book value, but many extended loans rely on tenants holding steady NOIs through 2026.
Demand Dynamics. Industrial and necessity retail still attract credit; office and hospitality assets see rent flatlines and vacancy drags that pressure recast DSCRs.
Asset Strategies. Owners tighten OPEX and front-load TI/LC budgets to sustain occupancy. Pro formas are assuming zero rent growth and longer lease-up cycles.
Capital Markets. Term sheets reflect 60–65% LTV caps, 1.30× DSCR minimums, and 150–250 bps credit spreads over Treasuries. CLO and CMBS buyers remain selective.
Loan workouts climbing as refinance math breaks at 7% rates.
Defensive bias toward industrial and necessity retail credits.
Lenders focusing on extensions over foreclosures.
Rising risk premiums keep spreads wide despite Fed pause
🛠 Operator’s Lens
Refi. Model debt yields ≥10% and size to ≤65% LTV; engage lenders 6–12 months pre-maturity.
Value-Add. Keep 10–15% capex contingency; tie spend to executed leases.
Development. Stress-test pro formas at +200 bps exit cap and financing rates >7%.
Lender POV. Banks offering short extensions with cash sweeps; CMBS underwriters price risk at AAA ≈ +100 bps, BBB– ≈ +450 bps over Treasury.
Fed likely to hold rates steady through mid-2026; gradual cuts would relieve refi pressure.
New loan-mod reporting rules (Dec 2025) may reduce transparency on troubled credits.
Distress sales and recaps to reset pricing benchmarks by mid-2026.
Watch private credit growth and office maturity spikes into 2027 as systemic risk indicator.
Federal Reserve Bank of St. Louis — Quarterly Bank Lending Survey: CRE Loan Modifications (Oct 2025). https://stlouisfed.org Deloitte — 2025 Commercial Real Estate Outlook (Sep 2025). https://deloitte.com MBA — Commercial/Multifamily Mortgage Debt Outstanding Report (Q2 2025). https://mba.org Trepp — CMBS Conduit Loan Spread Index (2025). https://trepp.com/treppinsights-conduit-loan-spreads
