US banks flag concerns over commercial real estate as debt distress reaches highest level in a decade
The largest lenders in the US have been building their loss provisions in case loans to the commercial real estate sector turn sour over the coming months.
In third quarter results released over the past couple of weeks, banks have flagged looming difficulties in the sector.
At Wells Fargo, provisions for credit losses increased by over 50 per cent to $1.2bn, primarily due to issues in the commercial real estate market. At Morgan Stanley, provisions for bad loans climbed by $100m reflecting “deteriorating conditions in the commercial real estate sector”.
Goldman Sachs meanwhile flagged $358m in provisions for its real estate investments. Bank of America’s nonperforming loans increased by $707m from the previous quarter, again driven by concerns over real estate.
Commercial real estate has been an area of concern in the US for the last few years with the pandemic and the rise of flexible working denting office valuations.
Many companies who bought offices in an era of low interest rates are now also facing spiralling bills when looking to refinance.
Lower occupation rates and higher bills are not a good mix. According to figures out yesterday from MSCI Real Assets, the value of distressed commercial real estate in the US neared $80bn in the third quarter, its highest level in a decade.
In its Financial Stability Report earlier this year, the Federal Reserve said that “with CRE valuations remaining elevated, the magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of CRE debt”.
Capital Economics suggested that office values could fall 50 per cent in San Francisco and Portland, “with Chicago and NYC not faring much better”.
In some cities – like San Francisco and Seattle – vacancy rates could rise by more than five percentage points to 2025, Capital Economics said. This would mean vacancy rates have increased by 12.5 percentage points since the final quarter of 2019.