Some of the country’s largest financial institutions are distancing themselves from office loans amid market uncertainty. JPMorgan, Deutsche Bank, and Barclays are some of the banks reportedly looking to sell off office loans in cities like New York and Washington, D.C. and are offering discounts on the loans to potential buyers. The news is a sharp turnaround from the beginning of the year, when lending activity reached a record high of $316 billion in new commercial property loans, according to the Federal Reserve. Discounts being offered on deals are reportedly ranging from 3 percent to 25 percent on both non-performing and performing loans. Other non-bank real estate lenders like debt funds, mortgage real estate investment trusts, and life insurance companies are also looking to reduce their risk.
Rising interest rates, the cooling economy, and uncertainty around the future of office given how prevalent remote and hybrid work has become are all leading into lenders’ decision to sell off office loans. There’s also the concern over office property values dropping significantly over the next several years as a result of remote work trends. Over the summer, a study by researchers at New York University and Columbia University found that by 2029, U.S. office values could decrease by $500 billion. “The market is terrible: If you don’t have to sell something, you shouldn’t be selling it,” Madison Realty Capital Managing Principal Josh Zegen told Bloomberg.
Major lenders had already begun scaling back new financing as interest rates continued to rise over the summer and into the fall. Meanwhile, the Federal Deposit Insurance Corp. said in August that it would be keeping a closer eye on banks with high numbers of commercial real estate loans. The most recent market reports show that the U.S. office market cooled in the third quarter. Sublease space hit a new record high, vacancy ticked up, and the number of signed office leases dropped significantly since the same time period last year. With interest rates as high as they are, it’s hard to imagine a rebound for office lending to happen until inflation cools off and interest rates come back down to normal, and it’s anyone’s guess when that will happen.
