JPMorgan Chase and Wells Fargo are providing little evidence that a turnaround in the troubled office market is imminent.
Wells, the third-largest bank in the United States as measured by assets, had a slight improvement in credit quality for its commercial real estate loans in the few months of the year, though the San Francisco company held fewer of the loans on its books.
JPMorgan’s earnings report was light on details regarding its commercial real estate loan portfolio, but the New York-based company said it had generated less revenue from that business segment in the first quarter.
Weakness in commercial property lending has been ongoing for years on account of high office vacancy rates, with remote and hybrid work settling in after the pandemic hit, while companies have been cutting costs amid higher interest rates. Against that backdrop, neither JPMorgan nor Wells executives were expecting office lending to improve during the first three months of 2024 — and they didn’t express a lot of increased optimism for the next three months.
“In our commercial portfolios, the weakness we see continues to be in certain commercial office properties, but our expectations have not significantly changed versus what we anticipated last quarter,” Wells Chief Executive Charlie Scharf said in a conference call on Friday.
Wells charged off fewer commercial real estate loans in the first quarter, with net loan charge-offs falling 28% to $341 million compared to the previous quarter. The bank cited lower losses in its office portfolio as the reason for the improvement.
At the same time, Wells held fewer commercial real estate loans on its books. Its total commercial mortgage portfolio decreased 1% to $148.8 billion.
JPMorgan, the largest bank in the United States measured by assets, said revenue from commercial real estate banking had dropped 2.6% to $909 million in the first quarter of 2024 compared to the fourth quarter of 2023.
JPMorgan decreased its provision for credit losses by $31 million in the fourth quarter in its commercial banking portfolio, which includes loans for commercial real estate and the daily operations of businesses.
Positive macroeconomic trends drove the increase but commercial real estate lending weakness prevented an even better improvement, according to the company. It didn’t provide detailed figures on the impact from commercial mortgages.
“I personally have not seen or heard anything to suggest that the office space is going to get better anytime soon,” JPMorgan chief financial officer Jeremy Barnum said at a Feb. 27 investor conference sponsored by UBS.
JPMorgan held about $200 billion in commercial mortgages at the end of 2023, with about 8% of the portfolio attached to office properties.
Bank of America, the second-largest bank in the United States by assets, is scheduled to report first-quarter earnings on Tuesday. Hundreds of publicly traded regional and community banks will issue earnings reports in the coming weeks, prompting real estate investors to closely watch earnings reports from some of these regional and community banks because they often provide more specifics related to commercial property than the major financial institutions.
One example is BankUnited, a Miami-based bank with operations in Florida and the New York tri-state region. BankUnited reported in December that 8% of loans in its $1.8 billion office-loan portfolio were on criticized status. Banks mark loans as criticized for a variety of reasons, including the borrower having an elevated amount of debt or poor liquidity.
BankUnited is scheduled to report earnings on Wednesday.