Office Space Developments in Commercial Real Estate May Trigger Stress for PNC and Wells CFOs
In the ever-evolving landscape of commercial real estate (CRE), banks are facing growing concerns, with the office segment emerging as a major area of focus. The COVID-19 pandemic and the rise of hybrid and remote work have put pressure on office properties, causing vacancies to rise and property values to plummet.
Wells Fargo, a leading player in the CRE market, has around 16% of its total loans allocated to commercial real estate. However, the bank's institutional office segment has experienced some strain, with an 11% coverage ratio and a few charge-offs, according to CFO Mike Santomassimo. In contrast, multifamily properties in Wells Fargo's portfolio have low delinquencies.
Similarly, San Francisco-based PNC has approximately $5 billion exposed in the CRE office segment. About 42% of PNC's office loans are maturing in the next year, and the bank has identified that around one-quarter of these loans are at a higher risk of default. PNC CFO Robert Reilly shared similar sentiments, stating that the office sector is where the pressure lies. Within PNC, the multi-tenant office piece is where the most pressure and potential losses are seen.
Charlotte, North Carolina-based Truist has labeled about 30% of its $5 billion office loans portfolio as higher default risk. The bank is being more cautious in the CRE office sector, especially in light of potential issues with higher risk loans.
Fitch Ratings predicts that loan performance in the CRE office segment will further weaken through 2025. This trend is causing concern for bank CFOs, with rising vacancies and higher interest rates increasing borrowing costs just as many loans are set to come to maturity and need to be refinanced.
About three-quarters of the focus loans get arranged as a new deal with more support or collateral, but the remaining balance of focus loans is nonperforming loans and potential charge-offs. As of 2024, no publicly available sources specifically identify which banks had particularly high shares of non-performing or written-off loans in their US multitenant office real estate portfolios due to COVID-19 and changing work patterns.
Despite the challenges, both Santomassimo and Reilly characterize the efforts to ease pressure in the CRE sector as a "long movie" that is just "a little past the opening credits." Banks are navigating these difficult times, working to secure their loans and weather the storm in the office CRE market.
