By Riva Gold, Editor at LinkedIn News
Nearly $1.5 trillion in commercial mortgages are due over the next three years, according to data provider Trepp, putting a number of landlords at risk of default. Commercial borrowers have piled into interest-only loans, making interest-only payments during the loan, with the principal due at the end. While borrowers typically made the final payment with a new loan or by selling the building, that’s getting harder as rising interest rates and banks’ reluctance to issue new loans for office buildings are pushing up the risk of delinquencies.
- Remote work and e-commerce are hitting demand for malls and office buildings.
- A rise in defaults could lead to distressed sales and lower property values.
- Some U.S. banks are ready to sell off property loans at a discount as they look to reduce exposure to commercial real estate, reports The Financial Times.
- In the first quarter of 2023, the commercial real estate loan delinquency rateincreased by 12 basis points to 0.77%, according to a report by S&P Global Market Intelligence.
US banks prepare for losses in rush for commercial property exit
ft.com • 4 min read
https://www.ft.com/content/3e905e3c-697c-4109-bd9a-605e75a0cfa4
The eyebrows go up when a US Bank wants to sell a performing loan at a material discount. Why would any financial organization take a 10% discount to par?
Well if the loan is for a legacy office building, you can take the loss now, or wait and take a more significant loss later. The Banks know the legacy office market is not cyclical in this cycle as it has been in every other cycle over the last 100 years. The probability of recovery is slim to none.
HSBC USA is in the process of selling hundreds of millions of dollars of commercial real estate loans, potentially at a discount, as part of an effort to wind down direct lending to US property developers.
Last month, PacWest sold $2.6 Billion of construction loans at a loss.
Wells Fargo CEO Charlie Scharf said that the bank, which has $142 Billion in CRE loans outstanding said “We will see losses, no question about it.”
There are other examples in the article. Moving forward, securing financing of any type for an office asset will be next to impossible for the immediate future. When and if this will soften is anyone’s guess.