Business is booming.

Banks rocked by looming commercial real estate meltdown

Wells Fargo’s outstanding commercial real estate loans were $154.7 billion (16% of total loans), with $35.7 billion in office loans at the end of March. Potential loan defaults and declining values of office properties have posed concerns for some lenders in recent months.

Blackstone president Jonathan Gray emphasized the “unprecedented weakness” in older office buildings, which accounts for less than 2% of the firm’s real estate equity portfolio. 

“Vacancy is 20-plus percent, rents are declining, companies now are obviously thinking about their space needs in light of remote work and the economic climate that’s ahead,” Gray said. “Lenders are reluctant to have exposure to office buildings. Buyers are reluctant. Valuations are going down.”

However, the size of losses will be “dramatically different” compared to the housing crisis 15 years ago, according to Gray. Banks have set aside funds to cover potential loan losses for the recession expected to occur in the second half of the year.

Read more: Commercial real estate, a red flag for banking sector recovery – JPMorgan CEO

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