Real Estate News
Late last year, a Deutsche Bank subsidiary and another German lender sold the delinquent mortgage on the Argonaut, a 115-year-old office complex in midtown Manhattan. Around the same time, Goldman Sachs sold loans it held on a portfolio of distressed office buildings in New York, San Francisco and Boston.
“What you’re seeing right now are isolated cases,” said Nathan Stovall, head of financial institutions research at S&P Global Market Intelligence. Adobe Stock
June 24, 2024 | 5:40 p.m
Some Wall Street banks fear that landlords of vacant and struggling office buildings will be unable to pay off their mortgages and have begun selling off their portfolios of commercial real estate loans in hopes of limiting their losses.
It’s an early but telling sign of the broader distress brewing in the commercial real estate market, which is suffering from the dual impact of high interest rates that make it difficult to refinance loans and low occupancy of office buildings – a result of the pandemic.
Late last year, a Deutsche Bank subsidiary and another German lender sold the delinquent mortgage on the Argonaut, a 115-year-old office complex in midtown Manhattan, to the family office of billionaire investor George Soros, court records show.
Around the same time, Goldman Sachs sold loans it held on a portfolio of distressed office buildings in New York, San Francisco. and Boston. And in May, Canadian lender CIBC completed $300 million in mortgage sales on a series of office buildings across the country.
“What you’re seeing right now are isolated cases,” said Nathan Stovall, head of financial institutions research at S&P Global Market Intelligence.
Stovall said sales have increased as “banks look to reduce their exposure.”
According to data from S&P Global Market Intelligence, the distressed commercial loans that banks are trying to shed represent only a fraction, in both number and value, of the roughly $2.5 trillion in commercial real estate loans held by all banks in the United States States hold.
But these moves suggest that some lenders are reluctant to accept that the banking sector’s strategy of “extend and pretend” is losing steam and that many property owners – particularly office building owners – will default on their mortgages. This means that large losses for lenders are inevitable and banks’ earnings will suffer.
Banks regularly “extend” the time that struggling property owners have to find rent-paying tenants for their half-empty office buildings, “acting as if the extensions will allow landlords to get their finances in order.” Given the lot today Higher interest rates have also made lenders avoid pushing property owners to renegotiate expiring loans.
But banks act out of self-interest rather than compassion for borrowers. As soon as a bank forecloses on a defaulting borrower, there is a risk that a theoretical loss will become a real loss. Something similar happens when a bank sells a delinquent loan at a significant discount to the balance owed. However, the bank believes it is still better to take a loss now than risk greater damage if the situation worsens in the future.
While the problems with commercial real estate loans are dire, they have not yet reached crisis levels. The banking industry recently reported that nearly $37 billion in commercial real estate loans, or 1.17% of all loans held by banks, were in default – meaning a loan payment was more than 30 days past due. After the 2008 financial crisis, bank commercial real estate loan defaults peaked at 10.5% in early 2010, according to S&P Global Market Intelligence.
“The banks know they have too many loans on their books,” said Jay Neveloff, who leads the real estate practice at Kramer Levin.
Neveloff said banks are starting to put out feelers to see what kind of discount would be necessary to entice investors to buy the worst part. Neveloff said he was working on behalf of several family office buyers who were contacted directly by some major banks with offers to purchase discounted loans.
Currently, banks are inclined to market deals privately to avoid attracting too much attention and potentially scaring their own shareholders.
“Banks are reaching out to select brokers and saying, ‘I don’t want to make this public,'” Neveloff said.
Banks are also feeling pressure from regulators and their own investors to reduce their commercial real estate loan portfolios – particularly after the collapses of First Republic and Signature Bank last year. Both were large commercial real estate lenders.
According to S&P Global Market Intelligence, regional and community banks — those with assets of $100 billion or less — account for nearly two-thirds of the commercial real estate loans on bank balance sheets. And many of those loans are held by community banks that have less than $10 billion in assets and lack the diversified revenue streams of much larger banks.
Jonathan Nachmani, managing director of Madison Capital, a commercial real estate investment and financing firm, said hundreds of billions of dollars in office building loans are coming due in the next two years. He said that banks did not sell their loans en masse because they did not want to take losses and there was not enough interest from large investors.
“That’s because no one wants to touch the office,” said Nachmani, who oversees the company’s acquisitions.
Michael Hamilton, a principal in the real estate practice at O’Melveny & Myers, said he has been involved in a number of deals in which banks have quietly given borrowers a year to find a buyer for a property – even if that so be A building is sold at a significant discount. He said banks are interested in avoiding foreclosure and that borrowers benefit from being able to walk away from a mortgage without owing anything.
“What I’ve seen is the roaches are starting to come out,” Hamilton said. “The general public is unaware of the severity of the problem.”
This article originally appeared in The New York Times.
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