Why Banks Are Retreating From Commercial Real Estate

Why Banks Are Retreating From Commercial Real Estate

Amerant Bank, a large community bank based in Coral Gables, Florida, recently announced that it had reached a deal to sell a $401 million portfolio of loans tied to a collection of apartment buildings in Houston for $370 million – a roughly 7% discount on the debt’s remaining balance. 

Amerant’s chief executive, Jerry Plush, described the planned sale on a January 25 earnings call as part of an effort to refocus its business on clients with whom the bank has an ongoing relationship.  

Banking and loan experts, however, see deeper motivations behind the decision by the bank and a growing number of other financial institutions that are beginning to unload commercial real estate loans.

“I don’t ever like banks having to take a loss,” said Stephen Scouten, a senior research analyst at Piper Sandler who covers Amerant. “Longer term, it’s probably of some benefit.” 

Roughly $2.1 trillion of debt connected to commercial real estate assets, including office properties, apartment buildings, hotels, and retail spaces, will come due between now and the end of 2025 in the US, according to the real estate services firm JLL. With higher interest rates sapping commercial property values, JLL estimates that property owners will have to pour about $265 billion into paying down those loan balances in order to refinance.  

The wave of maturities and the enormous equity shortfalls have raised concerns that a growing number of commercial real estate debts will fall into distress, forcing banks and other lenders to suffer losses.  

The recent loan sales suggest that lenders are beginning to take a defensive posture, diminishing their exposure to the commercial property sector and raising cash. 

“Staring at a problem is not going to make it go away,” said Kevin Aussef, the president of US investment sales at CBRE, who noted that the firm had just been hired by the Canadian bank CIBC to sell a $316 million bundle of US office loans. “At some point in time, you are better off responding to it than waiting.” 

Aussef said that, for the time being, banks were seeking to sell off healthier loans at prices close to the face value of the debt and avoid heavily discounted sales that might force them to mark down loans more broadly across their portfolios.     

“We’re not seeing an avalanche of these lenders coming to the market,” Aussef said.

The pace, however, is picking up. 

David Tobin, a cofounder of Mission Capital, a loan sale advisory that is a subsidiary of the property brokerage firm Marcus & Millichap, said that an increase in loan dispositions began in the second half of 2023, when major institutions like PacWest, HSBC, and Synovus sold notable portfolios.

His group tracked about $15 billion of commercial property debt sales during the year, roughly three times the volume from 2022. Hard data on such loan dispositions is scant and transactions are not always public, but Tobin said he expects a similar amount to trade in 2024. 

“It should be a robust market,” Tobin said. Buyers can include real estate investors willing to take control of the property assets tied to the loans or who see an opportunity to assume debts that pay attractive returns.  

More discounts to come?

Not every potential investor, however, is ready to buy just yet. Some see bigger discounts in the near future as distress picks up.  

David Frosh, CEO at the specialty lending firm Fidelity Bancorp Funding Inc., for instance, said that banking executives in recent months have begun to inquire with him “every other week” to gauge his interest in purchasing commercial property loans they hold. 

None have grabbed his interest however, he said, because they’re not being offered at sizable enough markdowns.

“At the end of the day, the defaults are coming,” Frosh said. “How big and when, I don’t know.” 

Commercial real estate loans differ from residential mortgages taken by homeowners in that most are interest-only or pay down their principal balance minimally and span a decade or less. The system can subject property owners to the debt market during inopportune moments, such as the aftermath of the financial crisis when credit dried up, and today, where rates have risen to their highest level in decades. 

Segments of the property market are in worse shape than others. Some office properties, for instance, have suffered a fundamental shift in value as a result of the widespread adoption of remote work and diminished leasing demand.    

Only 51% of securitized office loans were refinanced between October 2022 and December 2023, according to Fitch – well below the 73% refinance rate for the wider commercial real estate market. The ratings agency projects the situation will deteriorate in 2024, with less than 25% of maturing securitized office loans refinancing during the year.  

The agency predicts that office defaults will rise to 8.1% in 2024 and 9.9% in 2025 – higher than the 8.5% default peak during the financial crisis. 

Even major investors have abandoned office deals, including Brookfield, which walked away from a portfolio of office towers in downtown Los Angeles, and Blackstone, which defaulted on 1740 Broadway, an office building near Columbus Circle in Manhattan. Bloomberg recently reported that the special servicer for the roughly $300 million securitized loan tied to 1740 Broadway was shopping the loan to potential buyers for half the value of the debt. The special servicer, Midland, declined to comment for this article.    

“We wrote this property off two years ago, and in the event a buyer is identified, we will work collaboratively to transfer the ownership,” a spokesman for Blackstone told Business Insider in an email.

Beyond the office sector, higher interest rates have fundamentally reset values across property types as investors seek returns that remain above the yields they can reap from risk-free investments like Treasurys. An investor considering a $100 million property, for instance, that produces $5 million – a 5% return – might today demand a higher yield of 8%. That shift would revise the property’s value to around $63 million if the rental income remains steady, wiping out some, or all, of its existing equity. 

Considering that lenders, in recent years, frequently extended debts up to about 60% of a property’s value, the decreases in property prices have also made existing mortgages outsized in relation to the new values. Frosh believes that such loans require double-digit discounts to become compelling to buyers.  

“Take the keys”

Some lenders and borrowers have arranged deals to extend debts in the hope that interest rates will drop this year, values and revenue will rebound, and a property’s financial situation can be salvaged.

The nearly $700 million in mostly securitized debt at Aon Center, an 83-story tower in Chicago, entered special servicing at the beginning of 2023, a situation where a property is flagged by its lender as nearing default.   

“We were in a position that nobody wanted to be in, which was high interest rates on the heels of a one- to two-year period where office leasing was slowed,” said David Blumberg, a managing director at 601W Companies, the investment firm that owns the tower.

The landlord, however, recently struck an agreement to add three years to the loan at a reduced interest rate. 

“Everybody’s consensus was that if we did a three-year extension, we’d get to the other side of the mess with certainty,” Blumberg said, referring to the property’s lenders and executives at 601W. 

The 1740 Broadway office tower

The officer tower at 1740 Broadway in Manhattan, owned by Blackstone.

Daniel Geiger


Such deals don’t come cheaply, loan experts say, requiring owners to invest millions of dollars of cash to pay down portions of the debt, create reserves for building improvements and other costs related to leasing space, and forgo fees and revenue until a property’s financial situation is stabilized. 

Blumberg said that 601W had to invest $40 million to receive the extension on Aon Center’s loan package.

Not every owner will decide to invest that kind of cash into the uncertain proposition that property values will bounce back in the next few years. 

“It’s really a question of what the sponsor thinks his property’s worth today and in the future,” said Rob Verrone, the founder of Iron Hound Management, a company that arranges and restructures commercial real estate debts. If “the lender says to you, we will give you an extension, but you got to put $10 million in, you may say: take the keys.”

More banks are exploring loan sales

Banks and other lenders generally aren’t eager to seize the real estate assets that collateralize their debt. Foreclosures can take months or longer and owning property is costly, requiring lenders to cover maintenance, insurance, and other operating charges. 

“You’ve got taxes that are mounting up, insurance costs that are as high as they’ve ever been on commercial properties,” said Bliss Morris, the founder and CEO of First Financial Network, a loan sale broker and advisor who has offices in Oklahoma City and New York. “These are all things that the banks have to think about.” 

Morris said she has seen a growing flurry of banks who are exploring loan sales to avoid the risk of having to take back properties. 

“I can tell you, most of the bankers that we talk to today would just as soon exit the loan on as high a value note as they can versus getting into a long-term, drawn out foreclosure.” 

Originally Appeared Here

About Caroline Vega 228 Articles
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.