Real Estate

Overdue commercial property loans hit 10-year high at US banks

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Delinquent commercial real estate loans at US banks have hit their highest level in a decade, as higher interest rates, an uncertain economy and the rise of remote working pile pressure on building owners.

The volume of past-due loans in which owners of properties rented to others have missed more than one payment jumped 30 per cent, or $4bn, to $17.7bn in the three months to the end of September, according to industry tracker BankRegData. The figure had risen by $10bn in a year.

Bank lending remains in historically good shape and even after the recent jump, just 1.5 per cent of commercial property loans were past due. Nonetheless, industry watchers said the number of properties under pressure was likely to continue to rise, especially in the office sector.

Bill Moreland, who runs BankRegData, told clients that commercial real estate lending was “getting ugly fast”.

“It’s not a hiccup — it’s not Covid and then recover,” said Leo Huang, the head of commercial real estate debt at Ellington Management Group, an asset manager. “Property prices are going to come down and loan delinquencies are going to keep going up.”

Column chart of CRE delinquencies of non-owner occupied property loans ($bn) showing Delinquent commercial real estate loans hit highest level in a decade

The third-quarter data did not capture the impact of this week’s bankruptcy filing by desk rental company WeWork, one of the largest office tenants in cities from New York to San Francisco.

The Chapter 11 filing will allow WeWork, at least in the US, to rationalise its portfolio by terminating scores of leases with little financial penalty, putting pressure on building owners.

Wells Fargo recently cited WeWork’s troubles among its reasons for adding a $20.5mn mortgage on 599 Broadway, a midsized office building in lower Manhattan, to its watchlist of loans at risk of missed payments. The loan was made by Bank of America, but has since been sold to investors and is serviced by Wells.

With more than $70bn in commercial real estate loans outstanding, Wells is the nation’s largest lender in the category, and the most exposed to property losses. Its past-due property loans rose more than 50 per cent to $3.4bn in the third quarter, up from just $400mn a year ago.

Despite the rising delinquencies, Wells and other banks have been slow to put borrowers in default or otherwise declare actual losses on their growing pile of delinquent loans. Wells wrote off just $91mn in CRE loans in the third quarter.

On a call with analysts last month, Wells expressed optimism that many of those borrowers would restart payments or otherwise avoid losses, though the bank’s executives reiterated there would be some impact. “We haven’t really seen any losses of significance yet, but we will,” said Mike Santomassimo, Wells’ chief financial officer.

Kevin Fagan, the head of commercial real estate economic analysis at Moody’s, said he expected delinquency rates to climb for at least the next 12 months. There was “pain to come, that’s for sure”, he said, but he added it would it take time for delinquencies to turn into losses.

Among regional banks, Pittsburgh-based PNC had one of the biggest spikes in delinquent commercial real estate loans, more than doubling in the quarter to $723mn. “The pressures we anticipated within the commercial real estate office sector have begun to materialise,” Rob Reilly, PNC’s chief financial officer, told analysts last month. He added, however, that the lender had ample reserves to cover potential losses on those loans.

Other banks are stepping up their efforts to restructure property loans in order to avoid losses. At BofA, the volume of modified property loans, for which the bank had either forgiven interest or extended due dates, rose nearly $750mn to $1.2bn in the quarter. Across the industry, the volume of restructured commercial real estate loans has risen by $6bn to $8.5bn in the past six months.

“Bankers are going to extend the loans if they think the asset can be saved,” said Christopher Whalen, a veteran bank analyst and head of Whalen Global Advisors. “If the bank has to take back the building, the value can get cut in half.”


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