More than two years have passed since the Federal Reserve seismically shifted its fiscal policy and began hiking interest rates. With no signs that rates will go down any time soon, approximately $2.0 trillion of commercial real estate mortgages are scheduled to reach maturity from 2024 through the end of 2026. Banks with troubled loans on their balance sheets face increased regulatory and internal pressures to dispense with these bad loans, often at a discount and sometimes even with seller financing to a would-be note purchaser. 

Into this landscape, commercial real estate investors seeking to capitalize on distressed opportunities are increasingly investigating discounted note purchases. 

Distressed CRE Investing in Recent Downturns 

Back in 1992, following more than a decade of repeated savings and loans failures, Congress established the Resolution Trust Corporation whose mission was to maximize value from the sale of assets from failed thrifts while minimizing the impact on real estate and financial markets. This led to an onslaught of loan sales. The RTC faced harsh criticism for its susceptibility to loopholes and workarounds as well as its costly rollout.

When the Great Recession came in 2008, Congress opted not to employ a similar mechanism in managing the crisis, and loan sales were anemic. Lenders largely coalesced around the strategy of “extend and pretend” – extending maturity dates and pretending that the values and cash flows of the properties they had financed still supported their underwriting.

In the wake of the most recent downturn, lenders with thin balance sheets and facing regulatory scrutiny (and in some cases facing direct intervention by the Feds) have been inclined once again to consider selling failing, distressed, and potentially distressed CRE loans and notes. The auction of Signature Bank’s $33 billion CRE loan portfolio in the fall of 2023 may be viewed as a starting point for the growing trend, and as note sale transaction volumes grow and market valuations become better established, more lenders may look to move additional underperforming paper.