Commercial real estate loan modifications have increased sharply this year, according to data from the Federal Reserve Bank of St. Louis. U.S. banks reported a 66% increase in the total value of CRE loan modifications over the four quarters ending June 30, with the total rising from $16.7 billion to $27.7 billion.
Modifications may entail extending the loan term or temporarily deferring principal payments and collecting interest payments only to reduce the overall loan payment made by the borrower, the St. Louis Fed pointed out. “Prudent modifications done in a safe and sound manner can serve to mitigate adverse effects on borrowers and their communities,” wrote the St. Louis Fed’s Raelene Angle-Graves and Julianne Baer.
“Although modifications as a percentage of outstanding commercial real estate loans remain historically subdued, recent increases in modifications to CRE loans are worth paying attention to,” the wrote. “While it is difficult to pinpoint a specific cause using the data reported by banks, several factors may be at play, including changes in supply and demand for CRE, the rapid rise in interest rates from a low-rate environment and increased expenses associated with operating CRE properties.”
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