Wells Fargo Warns of More Office-Market Stress On The Way

Article originally posted on HERE on April 14, 2023

Wells Fargo & Co. warned about shakiness in the commercial real estate market and said it’s reviewing its more than $35 billion portfolio of office loans for ways to decrease risk.

The lender has been boosting its allowance for credit losses on office loans for the past four quarters, Chief Financial Officer Mike Santomassimo said on the bank’s first-quarter earnings call Friday. Provisions ticked higher in the first three months of the year in part because of commercial real estate loans, the bank said in a statement.

“The office market continues to show signs of weakness due to lower demand, higher financing costs and challenging capital market conditions,” Santomassimo said on the call. “We expect to see more stress over time.”

The bank cautioned that the stress wasn’t yet resulting in meaningfully higher losses. But cities such as San Francisco, Seattle and Los Angeles could face issues given the shift toward remote or hybrid work schedules and lower lease rates, the bank warned.

Commercial property owners are facing impending maturities this year on $400 billion of debt after interest rates soared, according to MSCI Real Assets. While banks account for a smaller portion of this year’s maturities than commercial mortgage-backed securities, they have more than 50% of loans coming due in 2026 and 2027, MSCI said.

Read more about how the tech industry’s retrenchment is hurting offices.

Office properties have particularly struggled with owners starting to default on those loans, sometimes in an attempt to kickstart negotiations with lenders. Office landlords are also grappling with the rise in remote work and a pullback from certain tenants.

The office vacancy rate in the US climbed to 20.2% in the first quarter, up from 19.6% in the last three months of 2022, according to brokerage Jones Lang LaSalle Inc.

Wells Fargo had $35.7 billion of office loans outstanding, or 4% of its total loans, at the end of March, according to a presentation Friday. Offices were the second biggest portion of the bank’s commercial real estate lending portfolio after apartments, the bank said.

The slowdown has hit commercial real estate already, particularly the office sector, Wells Fargo’s Santomassimo said in a Bloomberg Television interview Friday. The bank is going property by property to understand the situation.

For Wells Fargo, what matters is “who’s the sponsor, where’s the building, what are the characteristics of it and how do you get comfortable with it?” Santomassimo said. “And if all those things make sense, then we’ll lend against it. But overall, I would expect that that exposure will come down.”

JPMorgan Loans

Other lenders sought to clarify their exposure on the earnings calls. JPMorgan Chase & Co. CFO Jeremy Barnum, said that the majority of the bank’s commercial real estate exposure is in multifamily properties in supply-constrained markets. He called the bank’s office loan portfolio “quite modest” and said it mostly focused on higher-quality buildings.

JPMorgan Chief Executive Officer Jamie Dimon said much of the general tightening in lending will be reflected in the real estate market.

“Obviously, there’s going to be a little bit of tightening and most of that will be around certain real estate things,” Dimon said. “You’ve heard it from, you know, real estate investors already.”