US banks prepare for losses in rush for commercial property exit

• Published date: 05 June 2023
• Publication title: Irish Times: Web Edition Articles (Dublin, Ireland)

The willingness of some lenders to take losses on so-called performing real estate loans follows multiple warnings that the asset class is the "next shoe to drop" after the recent turmoil in the US regional banking industry

"The fact that banks want to sell loans is coming up in a lot of conversations," said Chad Littell, an analyst at CoStar, a research company focused on commercial real estate. "I am hearing more about it than any time in the past decade."

HSBC USA is in the process of selling off hundreds of millions of dollars of commercial real estate loans, potentially at a discount, as part of an effort to wind down direct lending to US property developers, according to three people familiar with the matter.

Meanwhile, PacWest last month sold $2.6 billion (€2.43 billion) of construction loans at a loss. And a clutch of other banks are making it easier to execute similar sales in the future by changing the way they account for commercial real estate debt.

Typically, banks are reluctant to accept losses on big blocks of loans that will retain their full value as long as borrowers make repayments on time. But some are being convinced to take the plunge amid fears of an increase in delinquencies – especially on debt secured against office properties that have experienced falling demand due to the enduring popularity of working from home.

Meanwhile, a slowdown in demand for commercial mortgage-backed securities has left banks of all sizes holding on to more property debt than they or regulators would like.

While the practice of offloading performing loans is not as prevalent as it was during the 2008 crisis, many market participants expect the volume of deals to increase this year and next.

As banks prepare to close the second quarter "they are super focused on keeping a clean loan book", said David Aviram, a principal at Maverick Real Estate Partners, a private fund that specialises in commercial real estate loans. "The banks don't want to raise the concerns of regulators or investors."

The moves by banks to offload the loans come as executives and regulators raise alarm bells over the health of the commercial real estate sector.

Wells Fargo chief executive Charlie Scharf this week told analysts and investors that the bank, which has $142 billion in commercial real estate loans outstanding, is managing its exposure to the area. "We will see losses, no question about it," said Scharf.

Meanwhile, Martin Gruenberg, chair of the US Federal Deposit...