California CRE Investors Believe 'Extend-and-Pretend' Dynamics Are Fading
There's been no shortage of headlines around rising commercial real estate delinquencies, particularly in office-heavy CMBS deals. But delinquency rates themselves may no longer be the most meaningful indicator of stress.
Investors are increasingly focused on what happens after loans become troubled – including refinancing risk, workout timelines, servicing behavior and the ultimate realization of losses across legacy CMBS vintages.
Plus, importantly, some California real estate investors believe "extend-and-pretend" dynamics are beginning to fade.
Seth Fisher at Prime Finance told GlobeSt.com that the market has largely moved past debating when rates will fall and is now focused on asset-level fundamentals.
In cities such as San Francisco, improving fundamentals are making those restructuring solutions increasingly viable, he said.
"The 'extend' part of the strategy can still make sense where there is a credible path to NOI growth," Fisher said. "The 'pretend' part—that lower rates alone will restore value—is becoming a much tougher argument."
Fisher said that, regarding the growing bifurcation between stronger post-pandemic vintages and older legacy loans, the market often frames it as a pre- versus post-pandemic story.
"I think it's more accurately a pre- versus post-rate-hike story," he said.
"Higher rates forced a reset in valuations, leverage, and underwriting standards. As a result, many post-hike vintages originated with higher debt yields, lower loan bases, and stronger structural protections, making them inherently more resilient than loans originated during the late-stage, low-rate environment."
Distressed properties are migrating from a valuation story to a restructuring and workout story, according to Fisher.
"Distress is increasingly shifting from a valuation problem to a capital-structure problem," he said. "Once values reset and markets achieve price discovery, the focus turns to whether fresh equity and a revised loan structure can create more value than a forced sale."
Source: GlobeSt/ALM