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  • Writer's pictureAndre Watson

Big US Banks Pull Back on Office and Apartment Lending

Slowdown Seen in CoStar Data Could Extend Into 2023, With Possible Bright Spots for Retail, Data Centers



Banks expect to see continued stress in the office sector, which could result in reduced lending. (Getty Images)


The nation’s largest banks that are most active in commercial real estate lending eased off their strong support for property purchases in the past several months, with CoStar data showing a particularly steep drop in financing for offices and apartments.


The trend is likely to extend into this year, based on comments from bank executives singling out office properties for weakness in their earnings reports this month.


While office building sales in 2022 made up 13% of total transactions, CoStar data shows, those sales fell 35% in the second half from the first half. The largest banks meanwhile financed 47% fewer office deals in the final six months of the year.


“The office market is showing signs of weakness due to weak demand, driving higher vacancy rates and deteriorating operating performance, as well as challenging economic and capital market conditions,” Mike Santomassimo, chief financial officer of Wells Fargo, said on the bank’s earnings call last week. “While we haven’t seen this translate to significant loss content yet, we do expect to see stress over time and are proactively working with borrowers to manage our exposure and being disciplined in our underwriting standards with both, outstanding balances and credits down compared to a year ago.”



The weakness is widespread even in the Class A properties on which Wells Fargo has originated loans.


“We are very watchful on cities like San Francisco, like Los Angeles, like Washington, D.C., where you’re seeing lease rates overall be much lower than other cities across the country,” Santomassimo added. “Those are markets that we’re keeping a pretty close eye on and making sure we’re being proactive with our borrowers to make sure we’re thinking way ahead of any maturities or extensions, options that need to get put in place to help manage through it.”

Largest Financed Deals

The data resulted from a review of 2022’s largest financed property sales by the biggest U.S. banks as tracked by CoStar, and additional lending activity could have occurred last year that wasn’t picked up in the data. Based on last year’s totals, retail and data center loans are shaping up to be possible bright spots for the finance industry in 2023.


In the analysis, Wells Fargo was among the most active bank lenders and tallied the largest loan total in both the apartment and industrial sectors. That is a focus that began for Wells Fargo in 2021, Nipul Patel, head of real estate banking within Wells Fargo’s commercial real estate group, told CoStar News in an interview.


The robustness of activity in the two sectors peaked in the first quarter of 2022, according to Patel.


Nipul Patel of Wells Fargo projected weaker lending activity in apartment, industrial and office properties. (Wells Fargo)


CoStar data shows that apartment property sales were 18% lower in the second half of the year than the first half. The largest banks financed 42% fewer apartment deals in the back half.


“The second half of the year for the most part was pretty dormant in regard to new origination activity both in the multifamily and industrial sector,” Patel said.


That pause is likely to continue early this year given elevated interest rates and price discovery going on with those property types, he said.

Apartments on Watch

Some of the nation’s other large banks reported increases in some types of apartments during their earnings calls.


JPMorgan Chase’s commercial real estate loans were up 2% quarter-over-quarter, reflecting a slower pace of growth from earlier in the year because of the higher rates, which affects both originations and prepayment activity, the bank said.


“The vast majority of loan balances in commercial real estate are for affordable multifamily housing, which is really quite secure from a credit perspective for a variety of reasons,” Jeremy Barnum, JPMorgan’s chief financial officer, said on the call. “So, we feel quite comfortable with the loss profile of that business.”


First Republic Bank, based in San Francisco, backed more apartment deals in 2022 than other property types. The bank reported achieving record apartment lending volume in 2022.


First Republic said it expects to continue that loan growth in 2023; however, it is maintaining conservative underwriting standards. The average loan-to-value ratio for all real estate loans it originated during the year was 57%, the bank said. Loans with that approximate LTV ratio are generally considered low risk.

Property Types With Promise

Where the financing outlook is brighter by property type is in retail, particularly such properties as grocery-anchored centers, and also in data centers, Patel of Wells Fargo said.


CoStar data shows that financing started picking up in the second half of 2022 by the largest banks in both the retail and specialty sectors. Retail loans by the largest banks were up 63% in the second half of the year, even though transaction activity was down 26% in the sector.


For specialty properties, such as data centers and self-storage properties, lending was up nearly 174%, according to CoStar data. Specialty property sales were up by nearly the same percentage in the second half of the year over the first half.

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