There Will Be More Stress In The Office Market, Warns Wells Fargo

Despite uncertainty in the commercial real estate market, Wells Fargo & Co. is reviewing its $35 billion portfolio of commercial mortgages in order to decrease risk.

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During the bank's first-quarter earnings call Friday, Chief Financial Officer Mike Santomassimo said the lender has increased its allowances for credit losses on office loans for the past four quarters. According to a statement from the bank, commercial real estate loans contributed to higher provisions in the first three months of this year. 

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A weaker demand environment, higher financing costs, and challenging capital market conditions continue to adversely affect the office market, Santomassimo said on the phone. "We expect more stress in the future."

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However, the bank cautioned that losses weren't yet significantly higher due to the stress. According to the bank, remote or hybrid work schedules and lower lease rates could create issues for cities such as San Francisco, Seattle, and Los Angeles. 

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According to MSCI Real Assets, $400 billion in commercial property debt will mature this year. In 2026 and 2027, banks will make up more than 50% of maturities compared to commercial mortgage-backed securities.

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Defaults on loans have been a particular issue with office properties, often in an attempt to restart negotiations with lenders. A pullback from certain tenants and the rise of remote work are also challenges for office landlords. 

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According to Jones Lang LaSalle, the US office vacancy rate increased from 19.6% to 20.2% in the first quarter.

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According to a presentation Friday, Wells Fargo had $35.7 billion of office loans outstanding at the end of March, or 4% of its total loans. In terms of commercial real estate lending, offices were the bank's second-largest segment after apartments. 

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As a result of the earnings calls, other lenders clarified their exposures. CFO Jeremy Barnum said that most of the bank's commercial real estate exposures are multifamily properties in supply-constrained markets. According to him, the bank mainly lent money to higher-quality buildings for its office portfolio, which was "quite modest." 

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Jamie Dimon, chief executive officer of JPMorgan, said that the real estate market will be affected by the general tightening of lending.

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The majority of the tightening is going to be related to real estate, Dimon explained. "Real estate investors already told you so."

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