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Major financial institutions are reportedly looking to reduce their exposure to office loans as the sector faces heightened scrutiny and risk of distress.
JPMorgan Chase, Deutsche Bank AG and Barclays Capital are looking to sell office loans in markets like New York City and Washington, D.C., and they are offering discounts to potential buyers, Bloomberg reports.
Lending in the U.S. hit record volume during the first half of this year at $316B in new commercial property loans, according to Federal Reserve data. But lenders have since slowed their financing of new commercial deals and are now looking to sell off some of their loans to reduce risk.
In August, the Federal Deposit Insurance Corp. announced plans to increase its stress-testing of banks that have high concentrations of commercial real estate loans.
Lenders are reportedly focused on unloading office loans in their portfolio because they have been hit hardest by the pandemic and the rise of remote work, leading to record-high vacancy rates in some markets and declining values for many lower-quality assets.
Big banks are reportedly running into issues finding buyers that want to take on these loans. To attract buyers, the lenders have started to explore selling loans at discounts ranging from 3% to 25% on both performing and nonperforming loans, Bloomberg reported.
“Office in particular is a dirty word for lenders,” Meadow Partners Managing Partner Jeff Kaplan told Bloomberg. “Liquidity has decreased quite dramatically over the last month and it does seem to be hitting office significantly harder than other property types.”
In the third quarter, 18% fewer office leases were signed than in the same quarter last year and 15% fewer than in Q3 2019, according to CoStar. Office lease terms and average square footage have shrunk, adding more risk as the economy continues to worsen.
In D.C., PGIM is looking to sell the $155M loan backed by 450 Fifth St. NW, a building that lost its federal government anchor tenant earlier this year, Real Estate Alert reported in September. The D.C. office market has faced rising signs of distress in recent months, with Hines reportedly handing a building back to lenders, and market insiders predicting that "a day of reckoning" is coming.
New York's office market has also faced these issues, with Blackstone in March handing back the keys to a Midtown Manhattan building. New York insiders have said they expect a wave of "value destruction" in the city's office market.
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