Kicking The Can
I read this article from the Financial Times on commercial real estate over the weekend.  It confirmed what I believe is happening with many maturing commercial real estate mortgages, lenders are just extending mortgages rather than reworking them.  I think the scale of loan maturities, the likely inability of borrowers to obtain new financing, and the unwillingness for banks and CMBS servicers to realize losses play into the "extend and pretend" mentality.  This quote did not surprise me but is still eye-catching:

To understand this, look at some numbers compiled by the Institute of International Finance, the Washington-based banking lobby group. The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since). 

Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, ie have mortgages in excess of the current value of the property”, it adds.

It's sobering to think that half of the $1.4 trillion in commercial real estate loans due before 2014 are underwater.   Reworking debt - not extending it -  will be the overriding theme driving commercial real estate for the next three to four years.  Lenders are going to have to start getting proactive on their loan portfolios, and stop waiting until borrowers default to begin discussions.