Federal Reserve Study Challenges CRE ‘Extend-and-Pretend’ Narrative

Key Points

• Federal Reserve Board research finds banks have become more selective about loan extensions across all property types since 2022, challenging the "extend and pretend" narrative.
• Refinancings have become a leading source of commercial real estate lending activity as borrowers work through loan maturities and restructuring needs.
• Extended loans continue to perform well, supported by stronger income requirements and principal paydown provisions.
• After 2022, the likelihood that a borrower’s principal paydown exceeded 5% of the loan balance climbed 5.1 percentage points, suggesting a tightening of credit standards.

What the Data Shows

Research published by the Federal Reserve Board indicates that since 2022, banks have become more selective in granting loan extensions across all property types, challenging claims that lenders broadly adopted “extend-and-pretend” strategies.

Even as refinancings and extensions increased as borrowers navigated higher interest rates and approaching maturities, lenders remained steadfast. “There is no clear sign of banks increasing extensions to hide the stress. Extension rates were roughly in line with historical norms,” the author concluded.

Refinancings Rose in Response to Market Conditions

Refinancings have become a dominant source of lending activity in small multifamily and other commercial real estate sectors. Small multifamily refinancings accounted for 71.6% of origination activity during the first quarter of 2026, according to Arbor's latest Small Multifamily Investment Trends Report, developed in partnership with Chandan Economics.

This concentration reflects a market driven more by loan maturities and debt restructurings than by new acquisitions. As borrowers navigate a higher-rate environment and evolving capital market conditions, refinancing activity remains crucial to maintaining liquidity and preserving asset value.

Loan Extensions are a Normal Part of Lending

Despite concerns about commercial real estate credit conditions, loan extensions remain a routine part of commercial real estate debt management.

According to the Federal Reserve Board’s research, roughly half of maturing commercial real estate loans received extensions in recent years. Since 2023, extension rates have remained broadly consistent with historical norms, indicating that lenders continue to operate within established industry practices.

Notably, extension rates were higher during the early stages of the COVID-19 pandemic than during the commercial real estate stress period that began in 2022. That comparison suggests current extension activity is not unprecedented and should not automatically be interpreted as a sign of deteriorating credit quality.

Why Refinancings Remain Prevalent Today

Several factors explain why refinancings and extensions continue to be widely used throughout the market:

• They give borrowers additional time to refinance existing debt or sell assets.
• They help avoid unnecessary foreclosure and asset seizure costs.
• They preserve value for both lenders and borrowers.
• They support financially viable properties experiencing temporary stress.

When used appropriately, these tools provide flexibility while maintaining credit discipline and protecting long-term asset performance.

Extended Loans Continue Performing

If lenders were simply postponing losses, extended loans would be expected to fail at elevated rates over time. The Federal Reserve Board's findings suggest the opposite.

The research found that extended loans generally pay off at high rates. Extensions made during the recent period of market stress performed as well as, and in some cases better than, comparable extensions issued before the pandemic, after adjusting for market conditions.

Poor performance outcomes are primarily attributed to broader commercial real estate market weakness, rather than lenders’ extension decisions, according to the study.

"Contrary to concerns about banks 'extending-and-pretending' following that episode, banks increased income and principal paydown requirements for extensions, contributing to strong ex-post performance for extended loans," the report stated.

Rather than relaxing underwriting standards, lenders strengthened extension requirements, helping ensure that borrowers demonstrate both property income stability and a commitment to debt reduction before receiving additional time.

The Takeaway

The Federal Reserve Board's research paints a picture of a commercial real estate lending market working through a wave of maturities with discipline. The research suggests that refinancings and extensions are being used as intended, helping fundamentally sound properties navigate temporary challenges while preserving value for lenders and borrowers.

At the same time, banks have tightened the terms attached to extensions, increasing income and principal paydown requirements and becoming more selective across all property types.

After 2022, the likelihood that a borrower’s principal paydown exceeded 5% of the loan balance increased 5.1 percentage points, suggesting the implementation of tighter credit standards post-pandemic.

Taken together, the findings indicate that lenders are not simply extending troubled loans and hoping for better outcomes down the line. Instead, they are applying stricter standards while continuing to support financially viable assets through a challenging market cycle.

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