US banks prepare for losses in rush for commercial property exit

US banks prepare for losses in rush for commercial property exit

Some US banks are preparing to sell off property loans at a discount even when borrowers are up to date on repayments, a sign of their determination to reduce exposure to the teetering commercial real estate market.

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 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, said three people familiar with the matter.

Meanwhile, PacWest last month sold $2.6bn 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 because of 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 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 last week told analysts and investors that the bank, which has $142bn in commercial real estate loans outstanding, is managing its exposure to the area. “We will see losses, no question about it,” he said.

Meanwhile, Martin Gruenberg, chair of the US Federal Deposit Insurance Corporation, last week warned real estate loans — especially those backed by offices — face challenges if demand remains weak and “values continue to soften”.

“These will be matters of ongoing supervisory attention by the FDIC,” he added.

Other banks are changing the way they account for loans by switching their designation to “available for sale” from “hold to maturity”, a move that makes it easier to offload the debt down the line.

Citizens, which has been reducing its commercial property lending, more than doubled its stock of loans available for sale to $1.8bn during the first quarter. Like many other banks, it does not disclose what percentage of those loans are to commercial real estate borrowers.

Customers Bancorp, based in suburban Philadelphia, cut its commercial real estate lending by nearly $25mn in the first quarter. It also recategorised $16mn of these loans as “held for sale”, up from zero in the previous quarter.

One loan broker said it was preparing to bring several deals to market in the coming weeks and was experiencing the largest amount of activity in three years.

The discounts applied to sales of performing loans outside of the office sector remain relatively modest and are driven partly by interest rate rises.

Real estate investment group Kennedy-Wilson, for instance, agreed to pay $2.4bn, or 92 cents on the dollar, for the block of PacWest loans that had an aggregate principal value of $2.6bn. Shares of PacWest surged nearly 20 per cent after it announced the transaction.

“We’re getting more calls . . . as a result of what PacWest was able to execute with Kennedy-Wilson,” one real estate credit investor said. “All the regional banks are looking at that stock price and saying ‘the market really liked that and we should execute something similar’.”

According to two of the people briefed on the HSBC sales process, the loans are fetching bids that would price them in the mid-90s as a percentage of their face value — meaning the bank would have to take a loss of as much as 5 per cent.

HSBC has not decided whether it is willing take a loss on the sale or how large one might be, said another person familiar with the process. HSBC declined to comment.

Originally Appeared Here

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Caroline Vega combines over a decade of digital strategy expertise with a deep passion for journalism, originating from her academic roots at Louisiana State University. As an editor based in New Orleans, she directs the editorial narrative at Commercial Lending News, where she crafts compelling content on commercial lending. Her unique approach weaves her background in finance and digital marketing into stories that not only inform but also drive industry conversations forward.