With inflation remaining elevated, the Federal Reserve has delayed the beginning of what some expected would be a string of interest rate cuts. That delay poses problems for some active commercial real estate lenders, according to property professionals.

About $929 billion, or 20%, of the $4.7 trillion in outstanding commercial mortgages are set to mature this year, according to the Mortgage Bankers Association. That's up from $729 billion in 2023. Most loans nearing maturity were originated when interest rates were lower than they are now, so it's costly for borrowers that are behind on payments to refinance at higher rates.

As a result, lenders are increasingly deciding to keep troubled loans on their books to buy time until the Fed cuts rates, a scenario of kicking the can down the road that creates risks, Alan Todd, head of research for U.S. commercial mortgage-backed securities at Bank of America, said in a report issued last week. During a recent panel discussion, Todd said, special servicers mentioned that the number of distressed loans transferred to their control more than doubled this year compared to 2023.

“This pickup in transfers was partly the result of the ‘higher-for-longer’ outlook for rates, which adds pressure for both fixed and floating-rate borrowers,” Todd said in the report.

A growing number of borrowers who are late on payments and are nearing their loan maturity date have contacted special servicers to explore refinancing options, Todd said. However, “the terms being offered on those loans tend to be generally more onerous than many borrowers were anticipating."

Recent loan modifications show that lenders are actively working to resolve problem loans and, depending on the borrower and the situation, hammer out a refinance or extension.

SL Green Realty and Vornado Realty Trust last month refinanced a $1.08 billion loan on 280 Park Ave., a 1.25 million-square-foot office property in New York. One analyst called the loan “the largest debt expiration of the year.”

The SL Green and Vornado loan was set to mature in September and had been transferred to a special servicer in December 2023. The two real estate investment trusts were able to refinance the loan after signing a 15-year renewal and expansion lease for about 270,000 square feet with the investment bank PJT Partners.

A spokesperson for SL Green told CoStar News it paid off a mezzanine loan that was also attached to 280 Park Ave., but declined further comment. A Vornado spokesperson declined to comment.

Smaller loans have been refinanced, too. Webster Bank refinanced a $34 million loan originally issued by UBS for a New Jersey veterinary clinic, according to Commercial Observer. The borrower, a joint venture between Crown Acquisitions and Paramount Realty, plans to expand 100 Schulz Drive for its client, a local animal hospital.

Borrowers can sometimes refinance troubled loans at lower rates if they make a down payment. A joint venture between Paramount Group and Blackstone Property Partners recently obtained a loan modification and extension on 1 Market St. in San Francisco. The loan was reduced to $850 million after they contributed a $125 million payment with the loan charging a fixed rate of 4.08%, according to CoStar data. The federal funds rate was 5.33% as of May 6, according to the Federal Reserve Bank of New York.

Federally insured banks are the largest holders of commercial real estate loans with about 38% of the total outstanding, according to the Mortgage Bankers Association. Banks are followed by commercial mortgage-backed securities and Fannie Mae and Freddie Mac.

One silver lining for banks is that overstuffed commercial real estate loan portfolios won’t be getting bigger anytime soon. Higher interest rates discourage developers from taking out loans for new projects, said Richard Murphy, chief lending officer at Wintrust Financial.

“Our CRE pipelines have slowed as higher borrowing costs have continued to affect loan demand,” Murphy said during an April 18 conference call. “We anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects.”

Wintrust is the holding company for several Midwestern community banks, including Lake Forest Bank & Trust and Old Plank Trail Community Bank, both near Chicago.

Some banks are actively pruning commercial mortgages from their holdings, especially loans for office buildings, including Huntington Bank in Columbus, Ohio.

“We’ve reduced [our] office portfolio by about $500 million over the course of the last four quarters,” CEO Stephen Steinour said during an April 19 conference call. “Our largest office loan is $40 million and the average is $7 million-ish.”

But things get trickier for lenders if the Fed decides to raise rates to combat persistently high inflation. If economic growth continues to overheat, the Fed may decide to pursue that route, investment bank Societe Generale recently told Bloomberg.

Some banks with large commercial real estate loan portfolios are less susceptible to risks from higher rates. At M&T Bank, the “vast majority” of the Buffalo, New York-based company’s commercial real estate loans carry fixed rates, Daryl Bible, chief financial officer, said during an April 15 conference call.

Thus, if inflation remains elevated and the Fed decides to raise rates again, “we see really very minimal impact on the portfolio,” Bible said. Most of M&T’s borrowers for commercial properties would continue to meet their debt-service commitments.

Industry professionals disagree on the effect on commercial property deal volume. On one side, according to some, if lenders continue to roll over troubled property loans, that raises the amount of capital that’s tied up and not available for new loans.

But that could also create an opening for those with dry powder, said John Sullivan, chair of the U.S. real estate group at law firm DLA Piper.

“The so-called ‘wall of maturities’ presents a double-edged sword,” Sullivan said in a recent report. “For owners and borrowers, it will be difficult to refinance assets at a level sufficient to repay the current loans. But this should also lead to asset repricing and buying opportunities.”

When borrowers on troubled loans walk away from the debt and hand the keys to the property back to the lender, those properties could hit the sales market, Sullivan said. In some instances, the seller is looking to dump the property quickly and will mark down the price.

“Many lenders prefer not to own these assets and these dynamics should create buying opportunities,” he said.