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Banks Believe They Are Well-Prepared for Bad CRE Debt
Major banks have largely dodged new losses this reporting season despite reports of office towers selling at steep discounts.
Jordan B.
April 21, 2024
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Good morning. Welcome to the weekend edition of CRE Daily.
📰 Feature: Banks dodged new CRE losses this reporting season
⏪ Catch up: The most-read stories from the week
👍️ Reviews: 4 new product reviews on CREDaily.com
📈 Chart: Major apartment markets in the West are recovering
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EARNINGS REPORT
Banks Boost Reserves for Office Debt, Yet Prepare for Future Losses
Major banks have largely dodged new losses this reporting season despite reports of office towers selling at steep discounts, but will the trend continue?
Well-prepared: Data from Autonomous Research shows that the median reserve for office loans among large banks held steady at 8% in the first quarter, consistent with the end of 2023. Overall, the loan-loss reserve ratio across all banks was below 2%, according to Federal Reserve data. While banks could reduce these reserves if actual losses increase, for now, they are maintaining elevated reserves.
By the numbers:
PNC Financial Services Group (PNC): Shares are up 2.98%. CEO William Demchak reported that office property values may have plummeted by 30-40%. The bank has $7.8 billion in office real estate loans and $50 million in Q1 net charge-offs, down from last quarter. Reserves increased to 9.7% from 8.7% at the end of 2023 despite a shrinking loan portfolio.
U.S. Bancorp (USB): Shares increased by 2.56%. Nonperforming commercial real estate loans rose from 1.45% to 1.71%, driven mainly by office properties. The bank maintained reserve coverage over 10% on office loans, with Vice Chair Terry Dolan noting aggressive reserving despite rising nonperforming assets.
Bank of America (BAC): Shares are up 3.35%. Recorded 16 office loan charge-offs in Q1, four from sales activities. CFO Alastair Borthwick believes significant losses have been preemptively reserved for, expecting lower losses in Q2 and the second half of the year.
New York Community Bancorp (NYCB): There was no change in share price. The company faced concerns over its commercial real estate lending, particularly with rent-stabilized apartments. A significant increase in loan-loss reserves majorly affected earnings, and a cautious approach towards adjusting reserves was noted among investors.
➥ THE TAKEAWAY
Why it matters: Extended periods of high interest rates might delay banks from refinancing commercial mortgages, particularly for properties like offices, apartment buildings, and warehouses that currently generate stable rental income. While inflation permits some properties to increase rents, the impact of rising rates varies. Troubled loans, especially for largely vacant office buildings that generate little to no cash flow, are less influenced by rate fluctuations because their issues are typically already recognized by lenders.
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⏪ Weekend Wrap-Up
Catch up on the most clickworthy stories of the week.
Housing boom: Build-to-rent home volumes are hitting fresh highs in the U.S. and breaking records, thanks in large part to one key region.
Rent growth: Tertiary markets show the highest rent growth potential. Top performers include Allentown, PA (can’t make that up), and Wichita, KS, at 4.2%.
Cooling down: Prologis (PLD), the world's largest industrial landlord, revised its 2024 financial forecasts downward in response to an anticipated slowdown in industrial leasing.
From offices to homes: Investor David Werner will potentially convert 100 Wall Street into a residential building, buying the 75% leased property for over $100M.
Calm seas: The IMF forecasts that the global economy will grow by 3.2% in 2024, up from its earlier 2.9% prediction, as the poorest countries lag behind.
Costly conundrum: Multifamily operating costs were up 7.1% YoY in January to $9K per unit, while insurance premiums surged 27.7% (up 129% since 2018) to $636 per unit.
Tenant tightrope: Office landlords remain reluctant to fund tenant improvements amid shaky fundamentals, turning to lower-cost solutions like second-generation spaces.
Homebuilder blues: In March, single-family homebuilding starts dropped by 12.4%, total housing starts declined by 14.7%, and multifamily construction plummeted by 20.8%.
What a steal: A private developer buys the former Rackspace HQ in San Antonio for just $21.5M, or a measly $17 PSF. That’s what you call a snipe.
We made a deal: NY Governor Kathy Hochul and state legislators have finally agreed on a deal to boost housing in New York. However, not everyone agrees on the potential outcomes.
Rent cuts for the rich: Luxury apartment rent growth dropped by 12.1% YoY, from 11.8% to -0.3%, due to the current oversupply of 4- and 5-star apartments.
👍 Product Reviews
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📈 CHART OF THE DAY
According to RealPage Market Analytics, the West region of the U.S. saw demand for about 69,000 apartment units in the year ending the first quarter, less than half the demand of the South region during the same period.
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