The high chieftains of real estate finance flocked to the Marriott Marquis in New York’s Times Square in June at a precarious moment for their business. Commercial property transactions were stalled, squelching demand for new loans. And loans made during the mid-pandemic go-go days, when the world was high on government stimulus money, needed fixing. Yet many conferencegoers were upbeat, trading notes on a surprisingly resilient economy and the media’s tendency to exaggerate the challenges. An after-party at Cipriani was “an absolute zoo,” says Toby Cobb, a managing partner at lender 3650 REIT, as if the industry were operating at peaks last seen in 2006.
It’s not that the market participants had forgotten the lessons of the global financial crisis that followed the 2000s boom. It’s that they remembered them. Faced with delinquent loan payments, lenders decided to be patient: Instead of foreclosing on properties whose value was plummeting, they lengthened loan terms and ignored short-term valuations. They called it “extend and pretend,” and it worked so well that when Covid-19 brought the global economy to a halt in March 2020, they turned to it again. A rolling loan, they said, gathers no loss.
Yet in some quarters there are growing fears that this strategy might not work this time. The rapid increase in interest rates over the past year sucked air out of inflated valuations. As a result, landlords need to come up with more cash to offset the lower building value when they refinance their debt. At the same time, banks and insurers are under scrutiny from regulators and ratings companies over their real estate lending. And the pandemic accelerated changes to how people use offices, with uncertain implications for everything from downtown lunch spots to the tax revenue of major cities.
