Overdue commercial real estate loans hit a 10-year high! Can the US banking sector hold up?

Golden10 Data ·  11/10/2023 13:14

The latest data has yet to reflect the impact of the shared office company Wework filing for bankruptcy. Wells Fargo, which has the largest outstanding commercial real estate loan, said losses will definitely occur.

Due to rising interest rates, economic uncertainty, and the intensification of telecommuting trends, Bank of America's overdue commercial real estate loans have reached their highest level in a decade.

According to data from industry tracking agency BankRegData, in the three months up to the end of September, owners were in arrears more than onceThe number of overdue loans jumped 30%, or $4 billion, to $17.7 billion. This figure has increased by $10 billion over a year.

Currently, US bank loans are still in a historically good state. Even after a recent sharp increase, only 1.5% of commercial real estate loans are overdue. Despite this, industry observers say the number of owners under pressure is likely to continue to rise, particularly in the office space.

Bill Moeland (Bill Moeland), the head of BankRegData, told customers that commercial real estate loans “are rapidly deteriorating.”

“It's not a small problem,” said Leo Huang, head of commercial real estate debt at asset management company Ellington Management Group (Ellington Management Group).“Real estate prices will fall, and loan delinquency rates will continue to rise”. 

Data for the third quarterDoes not reflect the impact of WeWork, an American “coworking space” company once known as a “unicorn,” filing for bankruptcy this weekWeWork is one of the largest private office tenants in the cities of New York and San Francisco, with a market value of 47 billion US dollars at one point.

According to Chapter 11 of the US Bankruptcy Code, WeWork will at least be able to rationalize its leasing portfolio in the US, that is, terminate dozens of leases with almost no financial penalties, thereby putting pressure on landlords.

For this part of the reason, Wells Fargo recently included a $20.5 million mortgage on a mid-size office building at 599 Broadway (599 Broadway) in lower Manhattan on its watch list for the risk of loan arrears. The loan was issued by Bank of America, but was later sold to investors and serviced by Wells Fargo.

Wells Fargo has over $70 billion in outstanding commercial real estate loans, is the largest in the US, and is therefore also the bank most vulnerable to property damage. The bank's expected real estate loans increased by more than 50% in the third quarter to $3.4 billion, up from $400 million a year ago.

Despite rising delinquency rates, many banks, including Wells Fargo, have been slow to announce actual losses from growing overdue loans.Wells Fargo wrote off only $91 million in commercial real estate loans in the third quarter.

In a conference call with analysts last month, Wells Fargo is optimistic that many of these borrowers will start repaying or otherwise avoid losses, while the bank's executives also reiterated that there will be some impact. “We haven't really seen any major losses yet, but this is going to happen,” Wells Fargo CFO Mike Santomassimo said.

Kevin Fagan (Kevin Fagan), head of economic analysis for commercial real estate at Moody's (Moody's), said he expectsAt least over the next 12 months, the delinquency rate will rise。 He said, “Pain is coming, that's for sure,” but added that defaulting on loans will take time to turn into losses.

Among regional banks, Pittsburgh-based PNC Financial Services Group is one of the banks with the most overdue commercial real estate loans, which more than doubled in the last quarter to $723 million. “The pressure we expect from the commercial real estate office sector is already beginning to show,” PNC chief financial officer Rob Reilly told analysts last month. However, he added that banks have sufficient reserves to cover potential losses on these loans.

Other banks are stepping up restructuring of real estate loans to avoid losses. At Bank of America, the bank's revised real estate loan volume (with either interest waived or maturing extended) increased by nearly $750 million during the quarter to $1.2 billion. Across the industry, the number of restructured commercial real estate loans increased by $6 billion over the past six months to $8.5 billion.

The translation is provided by third-party software.

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