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Banks’ office-loan exposure remains a ‘mixed bag’ as lenders manage through downturn


Banks continue to navigate a bumpy landscape in loans tied to a drop in office-space value and rent prices in many markets as workers stay at home.

In one high-profile example on Tuesday, New York Community Bancorp

cited a need to increase its allowance for credit losses (ACL) on the heels of an office loan that contributed to a $185 million charge-off loss and helped trigger a roughly 40% drop in its stock price.

“Given the impact of recent credit deterioration within the office portfolio, we determined it prudent to increase the allowance for credit losses coverage ratio,” New York Community Bancorp said.

Citi banking analyst Keith Horowitz said the issues with New York Community Bancorp appeared to be “isolated” with no read-through to other names. Much of the bank’s negative fourth-quarter surprise came from its move to add capital to its balance sheet to meet regulatory requirements related to its larger size from buying Signature Bank last year.

Moody’s banking analyst Stephen Lynch said exposure to office real estate continues to be pressured by lower occupancy rates as more people stay at home to work in the years after the pandemic, but it’s more of a “mixed bag” for banks depending on their geographic market and loan exposure.

In Manhattan, taking rents — the rents actually paid for office space — fell by 7.6% in the third quarter of 2023, compared to the pre-COVID-19 fourth quarter of 2019, according to Moody’s data in a Dec. 6 research note.

Los Angeles office space rent is down by 3.4% during the same period, and San Francisco is down by 31.9%, according to Moody’s data. All told, the taking rent on the top 25 markets was down by 3.8% in the third quarter of 2023, compared to the fourth quarter of 2019.

Moody’s is keeping a close watch on employment numbers, which have been robust and providing some support for the value of office real estate. Suburban office space also remains mostly healthy.

But banks with exposure to cities that act as regional hubs or gateway cities are more challenged, Lynch said. The areas often require longer commute times and workers would rather stay at home.  

“There are many ways to cut the pie,” Lynch told MarketWatch. “Gateway cities are being impacted more. If a city has a two-hour commute, it’s harder to get people back.”

Austin, Texas, and San Francisco have also seen vacancy rates climb, as has Washington, D.C. — all have long commute times.

In terms of banks, Moody’s has been studying maturity dates on loans in the office space.

“If the loans are coming due sooner rather than later, sponsors may have to kick in more equity,” Lynch said. “We’re looking at how loans are getting extended and whether interest rates in the loans are based on fixed- or floating-rate mortgages.”

Other banks have been faring relatively well on the office real-estate front.

““I’m pretty sanguine that the industry will work through it. Banks have thoughtfully taken the  expectation of losses into their reserves.  The industry will have to work through it with the slow but steady maturation of these loans, and take reserves. Overall it seems to be playing out in an orderly way over a period of years.””

— Zach Wasserman, financial chief of Huntington Bancshares

Citizens Financial Group’s stock

remains in positive territory for 2024 after the near-term guidance it provided Wall Street on Jan. 17 came in better than feared, Citi analyst Horowitz said in a research note. The bank also signaled positive signs in credit quality and said it could potentially release reserves.

Citizens’ Chief Executive Bruce Van Saun told MarketWatch the bank increased reserves for its $3.6 billion general office-loan portfolio to $370 million, which represents loan coverage of 10.2%, up from 9.5% in the third quarter.

The bank made modest adjustments to its model for loss drivers and it took $148 million in charge-offs in this portfolio, which is about 4% of its loans.

“We feel these assumptions represent an adverse scenario that is much worse than we’ve seen in historical downturns,” Van Saun said. “So we feel the current coverage is very strong.”

The bank is maintaining adequate reserves to cover its office portfolio, he said.

“Every loan is associated with a building and every building has unique characteristics,” Van Saun said. “Broadly speaking….The return-to-office effort has been slowing. It may be permanently different….You have to work through each loan.”

Also read: ‘No one is throwing good money after bad.’ Why 2024 looks like trouble for commercial real estate.

Zach Wasserman, financial chief of Huntington Bancshares Inc.
said office loans account for only 1.5% of its total loan portfolio, which is smaller than most other banks.

In the fourth quarter, the bank’s office portfolio absorbed a couple of “small” charge-offs, which is money the bank doesn’t expect to get back, he said.

The bank has a loan loss reserve on its office portfolio of 10.2%, which Wasserman described as strong.

“We think we have it pretty well-boxed,” Wasserman said.

More than two-thirds of the bank’s office-space exposure is in suburban areas, which are seeing more demand than downtown office space.

“We’ve been focused on reducing the number of sponsors we work with,” Wasserman said. “The point is we want to work with big, well-capitalized professional developers, not mom-and-pop and smaller developers.”

Also read: Big-city office buildings log 26% price drop from a year ago, report shows

The bigger developers have the wherewithal to support properties that may be somewhat challenged, he said.

The key questions for banks include: When are the loans maturing? And when are the leases underlying the properties maturing?

Broadly, the good news for office-building developers is these are typically multi-tenant properties with leases that tend to be long and staggered.

“There’s a pretty long runway — there’s no cliff typically,” Wasserman said.

The loans to office-space owners are maturing over a “fairly extended” timeframe, which is giving people the ability to address the situation over time, Wasserman said.

“I’m pretty sanguine that the industry will work through it,” Wasserman said. “Banks have thoughtfully taken the  expectation of losses into their reserves.  The industry will have to work through it with the slow but steady maturation of these loans, and take reserves. Overall it seems to be playing out in an orderly way over a period of years.”

Also read: Landlord debt is rallying — even in the battered office sector

New York Community Bancorp’s stock crushed on surprise loss, dividend cut and cost of two loans

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