Property loans are so unappealing that banks want to dump them


















































Banks want to get rid of real estate loans | Crain’s Chicago Business

Office building

Credit: Bloomberg


(Bloomberg) — Banks seeking to sell commercial-property loans are encountering a dried-up market with few options for an easy exit.

Lenders including Goldman Sachs Group Inc. and JPMorgan Chase & Co. have been trying to sell debt backed by offices, hotels and even apartments in recent months, but many are finding that tidying up loan books is no easy feat when concerns about commercial real estate have surged.

This year’s rise in borrowing costs has made commercial real estate one of the hardest-hit areas of the economy. Property sales, especially for office buildings, have slowed to a trickle, giving landlords and lenders few markers to determine the value of certain assets. In the absence of transactions, stakeholders are closely watching the loan sale market to see what price banks can ultimately nab for some of the loans.

Banks have been eager to sell what they can, at times to shore up liquidity or to avoid complicated situations that may crop up when a loan is maturing and needs to be refinanced. For some lenders, taking a slight haircut on the price may be better than running the risk that the lender has to foreclose and ultimately ends up stuck with the property, according to Gregory Hagood, president of SOLIC Capital, which has an investment banking practice.

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“Even if most of these are performing loans today, they’re trying to reduce their exposure by selling loans at a discount as they head into a refinance cycle,” Hagood said. “A lot of these banks will say, ‘I’d rather take the hit there than take the hit on a foreclosure and have to deal with the asset after.’”

Goldman and JPMorgan, along with other banks including Capital One Financial Corp. and M&T Bank Corp., have sought to sell property debt in recent months, seeking buyers both for one-off sales and transactions for portfolios of loans, according to people familiar with the matter, who asked not to be identified citing private information.

While pressure is building on banks to reduce their commercial-property exposure, distressed loan sales are still relatively rare. Many banks are opting to hold onto the debt for longer and work out situations with different borrowers.

With so few sales occurring, it’s been hard to figure out exactly what the loans are worth. On top of that, some sellers have become more cautious about what bids they’ll accept, especially after the spate of bank failures earlier this year. Too low of a price could spook investors and raise concerns about the health of the financial institution, according to Josh Zegen, co-founder of Madison Realty Capital, a non-bank lender.

“Some banks have tested the market on office loans and they just can’t hit the numbers,” Zegen said. “There’s too much of a bid-ask spread, and there’s really nothing to talk about because agreeing to the lower pricing would make these banks more insolvent.”

Given the banks’ caution about accepting too low of a price, some lenders have opted to entice buyers through other means. Seller financing has become one option, where the seller helps the loan’s buyer finance the purchase.

It’s become particularly challenging for debt tied to offices — the property type that’s seen its value plummet the most over the past 12 months. Job cuts and the rise in remote work have led to record vacancies across major cities, while higher borrowing costs have made financing more difficult.

“We don’t know yet where tenant demand shakes out, and in the absence of that, you can’t have stability in the market,” said Winston Fisher, a partner at New York-based real estate investment firm Fisher Brothers. “We’re a contractual income business. If you don’t know where that contractual income is going to stabilize, how do you value it?”

Capital One has struggled to offload a large office debt portfolio with a heavy concentration in the tri-state area including parts of New York, according to people familiar with the matter who asked not to be identified discussing private information.

Capital One Chief Financial Officer Andrew Young told investors in July that the bank had moved about $900 million of loans from its office portfolio to a “held for sale” designation as it seeks to offload the debt.

Earlier this year, Webster Financial Corp. sold an $80 million portfolio tied to offices and mixed-use properties in Connecticut, New Jersey and New York.

JPMorgan is exploring a sale of a $350 million loan that’s backed by Manhattan’s HSBC Tower, Bloomberg reported in July. The bank has approached potential buyers to sell the loan at par, while offering cheaper-than-market financing.

Spokespeople for Capital One and JPMorgan declined to comment.

Banks have also sought to sell debt on other types of real estate besides offices, such as apartments or hotels. Pricing has held up better for those property types, with apartment values dropping 16% over the past 12 months through July compared with a 27% decline for offices, according to real estate analytics firm Green Street. Hotel prices were unchanged over that time period.

Goldman has sought to offload hotel and apartment loans, according to people familiar with the matter, who asked not to be identified citing private information. Meanwhile, M&T is in the market with a hotel loan too, the people said.

Spokespeople for Goldman and M&T declined to comment.

Lenders that have found buyers for loan portfolios have used the deals to help shore up liquidity at a time of increased stress across the banking industry. PacWest Bancorp, for example, has been selling construction loans and other real estate debt.

Because recent loans at higher rates are more profitable, banks are becoming more inclined to get rid of low-yielding, high-maintenance “dead money” loans with limited prospects for returns, according to Will Sledge, senior managing director in Jones Lang LaSalle Inc.’s capital markets group.

“Liquidity is a prized possession,” Sledge said.

The industry is keenly watching one big potential sale that’s being managed by brokerage Newmark Group Inc. The Federal Deposit Insurance Corp. is seeking to offload about $60 billion of loans — many of which are tied to real estate — from the failed Signature Bank.

Banks are facing the prospects of getting stuck holding the properties in some situations. Large institutions, such as Brookfield Asset Management Ltd., Blackstone Inc. and an office landlord tied to Pacific Investment Management Co., have chosen to cut their losses on some buildings, defaulting on debt. In some instances, landlords have handed the keys back for certain properties.

Aareal Bank AG is working to sell debt on two Manhattan buildings where owners walked away. A unit of the bank is offering non-performing loans on two large offices, one in the Financial District and one in Midtown’s prestigious Plaza District, according to people familiar with the matter. A spokesperson for Aareal Bank declined to comment.

Even if banks are struggling to offload loans, some lenders are controlling their exposure to commercial real estate by halting origination of new debt. Banks including Fifth Third Bancorp have said that they’ve stopped originating office loans.

More deals for old loans would give better clarity on pricing, which could reveal just how different valuations are these days, according to Martin Nussbaum, principal of Slate Property Group.

“There’s a complete fear around office values and where they stand,” Nussbaum said. Repricing “could be a seismic shift in the asset class.” 

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