Major US Banks Cut Losses on Commercial Real Estate Non-Performing Loans
Although the COVID-19 pandemic has entered the endemic phase, global major corporations plan to expand remote work and further reduce office space. Amid growing concerns over the deterioration of commercial real estate loans, the market downturn is expected to deepen.
On the 6th (local time), Knight Frank, a residential and commercial real estate consulting firm headquartered in London, UK, conducted a survey targeting 350 multinational corporations employing over 10 million people worldwide. The results showed that the majority of companies responded that they plan to reduce office space by 10-20% within the next three years.
In this survey covering all industries including technology and financial services, half of the companies said they are even planning to relocate their headquarters within the next three years to reduce office space.
The ways these companies apply remote work are also diversifying. Among the 350 companies, 56% are considering adopting hybrid work that combines office attendance and remote work, 34% plan to maintain full-time in-person work, and 10% plan to switch to full-time remote work.
In the financial sector, JP Morgan ordered senior employees to work remotely full-time in April, while BlackRock requested a return to the office four days a week, effectively declaring an end to remote work, showing divergent approaches among companies.
Major U.S. cities such as San Francisco and Washington DC were identified as cities expected to experience significant commercial real estate vacancy rates over the next decade, with similar trends anticipated in major cities across Asia and Europe.
Elliot Lee, a commercial real estate expert at Knight Frank, predicted, "Considering lease expirations and other factors, changes in the commercial real estate market will continue over a longer term of 3 to 6 years, rather than 3 to 6 months."
Foreign media reported that the outlook for global major corporations to reduce office space is amplifying concerns about bad loans in commercial real estate, which is undergoing the worst downturn due to interest rate hikes.
In particular, concerns about the commercial real estate market downturn are deepening as major U.S. banks begin to 'cut losses' on bad commercial real estate loans.
Following the banking crisis triggered by the collapse of Silicon Valley Bank (SVB) in the U.S. last March, there are forecasts that bad commercial real estate assets could become the next crisis trigger. Foreign media, citing sources, reported that HSBC's U.S. branch recently decided to stop lending for commercial real estate.
PacWest Bancorp, a regional bank based in Los Angeles (LA), California, recorded a loss and sold $2.6 billion in real estate loan bonds last month, and Bancorp, a regional bank in Philadelphia, reduced its commercial real estate loan portfolio by nearly $25 million in the first quarter of this year.
Martin Gruenberg, Chairman of the U.S. Federal Deposit Insurance Corporation (FDIC). [Image source=AFP Yonhap News]
Executives of major banks and regulators are also warning about the soundness of the commercial real estate sector. Charlie Scharf, CEO of Wells Fargo, which has $142 billion in commercial real estate loan balances, told investors and analysts last week, "We have entered risk management for commercial real estate loans," adding, "We will undoubtedly see losses in commercial real estate loans."
Martin Gruenberg, chairman of the U.S. Federal Deposit Insurance Corporation (FDIC), also pointed out, "Commercial real estate is expected to face difficulties as demand remains weak," and "This is an issue that authorities will need to continuously supervise going forward."
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