A growing number of borrowers large and small are willingly opting to give their properties over to lenders. They can potentially write off the loss and reduce their outstanding debt.

The trend, as evidenced in the latest special servicer commentary on loans packaged in commercial mortgage backed-securities, suggests any economic recovery from the coronavirus pandemic could be drawn out, particularly in the hospitality and retail sectors.

More than $1.3 billion in loans is currently in some stage of a mutually agreed-upon transition from borrowers to lenders, according to a CoStar analysis of servicer and bond rating agency reports. Under an action known as deed in lieu of foreclosure, a borrower agrees to sign over the deed to a property to the lender in place of continuing to make loan payments.

“We’re in very unchartered territory here,” Ann Hambly, a 35-year veteran of the CMBS industry and CEO of 1st Service Solutions, which works with borrowers on strategies to pay back loans, told CoStar in an interview. “I’ve had about five deeds-in-lieu over the past 30 days. That’s a big number. I don't think I ever saw that in the 2008, 2009, 2010 downturn because people then would prefer to work it out.”

Instead, borrowers are now saying they have sunk all the money they want to spend on a loan and are ready to walk away, she said.

The prospect of a quick rebound is typically the deciding factor when it comes to holding properties or folding on them, according to Hambly, who gave an example using retail.

Borrowers on properties anchored by necessity retailers such as grocery stores could be OK in the long run and just need some temporary debt relief, she said. But borrowers on properties reliant on department stores and movie theaters — sectors going through potentially permanent changes — may decide now is as good a time as any to walk away.

Most of the deeds in lieu that Hambly is seeing now are in the sector. And CoStar research shows two of the largest loans currently considering a transition over to lenders are for hotels.

Last month, Colony Capital confirmed it was willing to give up control of a portfolio of 48 hotels to a receiver after missing April and May payments on a $780 million loan securing the properties. Colony is 90% owner of the portfolio, which includes the Residence Inn near New Jersey's Newark Liberty International Airport, in a joint venture with Chatham Lodging Trust. Traditionally, receivers are appointed to manage properties and turn over cash flow to the lender pending either a sale or foreclosure.

Also last month, Blackstone Group skipped a payment on a $274 million hotel loan secured by four Club Quarters hotels in Chicago, Philadelphia, Boston and San Francisco that it acquired in 2016.

The New York City private equity firm said it’s considering all options regarding the loan.

“This is a very small investment that had been written down prior to COVID-19 as a result of unique operational challenges,” a Blackstone spokesperson said in an email. “We will continue to work with our lenders and the hotel management company to create the best possible outcome under the circumstances for all parties, including the employees.”

Hotels make up a small portion of Blackstone’s global real estate holdings valued at $324 billion. In the company’s first-quarter earnings call, it noted about 80% of its portfolio comprises logistics, residential assets and high-quality office properties, with logistics being the most dominant theme.

It’s not just hotels showing up as potential deed-in-lieu transfers. Bahrain-based Investcorp International owns a shopping mall and office property that servicers noted could end up with lenders.

A $65 million loan on the Southland Mall in Miami transferred to special servicing in April. According to the servicer’s note, the borrower initially asked for debt relief but has since made the decision that the property would be unsustainable at its current debt level. The servicer is said to be determining the optimal workout strategy that achieves the highest recovery.

Investcorp officials didn’t return requests for comment on the Southland Mall nor on a $47 million loan on One Westchase Center, a 466,159-square-foot office building in Houston.

The servicer note on that loan said the borrower would like to transition the property to the lender due to pending loan maturity in October and because of COVID-19’s impact on the Houston economy.

Other loans currently identified in servicer notes and bond rating agency reports as potentially going back to lenders were for smaller loan amounts and various property types.

It’s likely, though, that the total amount of such loans could be much larger than indicated as not all servicers provide specific commentary on loan workouts. In addition, the amount could go higher as borrowers face continued disruption from the pandemic.