As the COVID-19 pandemic continues to place enormous stress on the commercial real estate industry—with hotels and shopping centers shuttered or experiencing depressed occupancy, urban apartments losing tenants and the lack of federal stimulus—an increasing number of commercial real estate loans is facing current or impending borrower defaults. The second quarter of 2020 reportedly saw a 65% increase in the overall delinquency rate for commercial real estate loans over the prior quarter, and upwards of $26 billion in commercial real estate loans have been downgraded to a rating of CCC or lower by a credit agency as of the beginning of September.
Lenders in default scenarios face a choice of whether to exercise remedies and take over their collateral, or (as has become the “practice prevailing in the current environment for balance sheet lenders,” according to Moody’s) offer relief measures to their borrowers, either in the form of short-term forbearance or a permanent loan modification.
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