Extend-and-pretend created a new wave of loan defaults
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Extend-and-pretend created a new wave of loan defaults

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Since rising interest rates spun many CRE loans into desperate need for refinancing, borrowers and banks have juggled the conditions through a strategy of extending and pretending. Just when a loan may default and cause problems for both parties, the terms are renegotiated to avoid the dilemma.

A new report from Gray Capital, which focuses mostly on multifamily, said “extending and pretending is coming to an end as lenders and stocks grow impatient with borrowers.” Instead of fixing problems, the approach has kicked the can down the road. Too many borrowers have yet to raise the additional capital they need or find other financing to pay off their existing loans. Lenders and shareholders are looking for an end to holding what is now risky debt. There is also only so long a company can hold a debt without writing it down.

There are several critics of extend-and-pretend. The Federal Reserve Bank of New York’s attempts to gloss over problems and wait for a favorable interest rate move are largely unhelpful. Instead, a staff report argued that the extension and sham process led to increased financial pressure on the banks.

Major banks have begun offloading parts of commercial real estate portfolios to avoid losses when office property owners are unable to make mortgage payments. They do it quietly to prevent attention to the market value of their portfolios.

Part of the Gray analysis was based on New York Fed research using multifamily-specific data from CoStar. It estimated that, for CRE as a whole, a new wave of loan delinquencies could peak in 2026. Specifically, multifamily activity could pick up in the third quarter of 2025.

Another part of the analysis is Gray’s projections that the Fed will cut the federal funds rate more slowly than hoped in 2022. “ Elevated interest rates will continue to put pressure on borrowers facing default, especially those with bridge loans or construction loans that have already done so. extended,” it was written.

The report projected an improved market in multi-family housing in a number of ways. Gray cited data from CoStar. Multifamily unit prices have moved up to about $200,000, well up from a low of perhaps $175,000 in mid-2023. Cap rates have risen from about 4.25% in early 2022 to 5.5% in 2024 , but CoStar estimated that they will decline over the next few years.

CoStar’s Q3 2025 loan delinquency estimate is 25% greater than the company’s 2023 projections. Additionally, multifamily deliveries are beginning to decline past historic construction levels in 2023 and 2024. Additionally, starts have dropped dramatically. The result is an equalization of supply. The combination of conditions means an increase in distressed investment opportunities.

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