JPMorgan and Deutsche Bank consider selling US office loans

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JPMorgan headquarters in New York

Major financial institutions are said to be looking to reduce their exposure to office loans as the sector faces heightened scrutiny and risk of distress.

JPMorgan Chase, Deutsche Bank AG and Barclays Capital are looking to sell office loans in markets like New York and Washington, DC, and they’re offering discounts to potential buyers, Bloomberg reports.

U.S. lending hit a record high in the first half of this year at $316 billion in new commercial real estate loans, according to Federal Reserve data. But lenders have since slowed their funding of new business deals and are now looking to sell some of their loans to reduce risk.

In August, the Federal Deposit Insurance Corp. announced its intention to increase its stress testing of banks that have high concentrations of commercial real estate loans.

Lenders are said to be focusing on offloading office loans into their portfolios as they have been hit hardest by the pandemic and the rise of remote working, leading to record vacancy rates in some markets and a decline in the value of many lower quality assets.

Big banks would struggle to find buyers willing to take out these loans. To entice buyers, lenders have started exploring selling loans at discounts ranging from 3% to 25% on performing and non-performing loans, Bloomberg reported.

“The office in particular is a dirty word for lenders,” Jeff Kaplan, managing partner of Meadow Partners, told Bloomberg. “Liquidity has declined quite dramatically over the past month and it seems to be hitting offices much harder than other property types.”

In the third quarter, 18% fewer office leases were signed compared to the same quarter last year and 15% less than in the third quarter of 2019, according to CoStar. Office lease terms and average square footage have declined, adding more risk as the economy continues to deteriorate.

In DC, PGIM is seeking to sell the $155 million loan secured by 450 Fifth St. NW, a building that lost its anchor tenant to the federal government earlier this year, Real Estate Alert reported in September. The DC office market has faced growing signs of distress in recent months, with Hines reportedly returning a building to lenders and market insiders predicting that “judgment day” is coming.

The New York office market has also struggled with these issues, with Blackstone returning the keys to a building in Midtown Manhattan in March. New York insiders said they expected a wave of “value destruction” in the city’s office market.

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