Banks across the U.S. are racing to restructure struggling commercial real estate (CRE) loans as higher interest rates and declining property values tighten the pressure on borrowers and lenders.

Modification momentum:

According to data from the St. Louis Fed, the total value of modified CRE loans jumped 66% year-over-year through June 2025. These adjustments—ranging from temporary rate relief and deferred payments to extended maturities—reflect mounting financial stress across the sector. The Fed notes, however, that “sound, well-documented modifications” can help limit systemic fallout.

From zero rates to survival mode:

The sharp rise in modifications stems from the shift from near-zero rates to today’s elevated environment. Loans originated during the easy-money years are now struggling to pencil out, leaving many borrowers underwater. Those without fresh equity or refinancing options are increasing banks’ exposure to potential write-downs.

Data tells the tale:

The volume of modified loans has been rising steadily as rate pressures, higher operating costs, and softening fundamentals weigh on property performance.

Lenders on defense:

With default risk climbing, many banks are padding reserves and taking a conservative stance. A growing number are opting for “extend and pretend” strategies—granting maturity extensions in hopes that time will bring market stabilization.

The looming maturity wall:

Loans made during the 2019–2021 low-rate boom are now hitting maturity, but refinancing is proving difficult. Lower valuations, steeper borrowing costs, and weakening demand—particularly in the office sector—are creating a tight squeeze for both borrowers and their lenders.

THE TAKEAWAY

Borrowed time:

Loan modifications may buy banks and borrowers a reprieve, but not a resolution. Without a decline in rates or a rebound in fundamentals, today’s short-term fixes could set the stage for tomorrow’s wave of write downs.