Wall Street banks are exploring sales of office loans in the U.S.

Some of the biggest lenders to U.S. offices are weighing sales of loans on the properties as regulators heighten scrutiny on commercial real estate debt portfolios. 

JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc are among companies privately gauging buyer appetites for office loans in cities such as New York and Washington where demand has dropped off, according to people familiar with the matter. Some lenders are offering discounts to make deals more attractive.

It’s an abrupt turnaround after a record burst of lending in the first half of the year, with $316 billion of new commercial-property loans, according to Federal Reserve data. While major lenders have already scaled back on new financing, they’re increasingly under pressure to reduce exposure to riskier loans they already have on their balance sheets, and federal regulators have warned they’re keeping a close eye on real estate sectors that have struggled during the pandemic.  

Toward the top of the list are offices: Nearly a fifth of the total square footage nationally was vacant at the end of the third quarter, according to data from brokerage Jones Lang LaSalle Inc. That’s led to a decline in values, especially for lower-quality buildings that have seen little to no demand from tenants in the remote-work era. Lenders selling loans are looking to get out before the market slides further. 

“Office in particular is a dirty word for lenders,” said Jeff Kaplan, a managing partner at Meadow Partners. “Liquidity has decreased quite dramatically over the last month and it does seem to be hitting office significantly harder than other property types.”

More Flexible

Not many debt deals have hit the market publicly yet, and most conversations right now are behind the scenes and largely preliminary. 

While banks have always had a business of selling loans, they’re indicating that they’re having more trouble finding takers in recent months. That’s leading to more flexibility in negotiating favorable terms for potential buyers.

Some banks are exploring selling whole loans at a discount, or creating a subordinate debt position for a buyer who would assume the riskier part of the loan, the people familiar with the matter said. Discounts offered on deals being marketed privately range from 3% to as much as 25% on both non-performing loans and performing, said the people, who asked not to be named discussing private information.

Spokespeople for JPMorgan, Deutsche Bank and Barclays declined to comment.

Lenders looking to sell office loans are bracing for a further decline in property values amid rising interest rates, a cooling economy and uncertainty around Covid-19’s long-term impact on labor and commerce. A study this year by professors at New York University and Columbia University projected that US office values may sink as much as 39%, or $453 billion, over the long term.

The direction of the market has raised alarms for the Federal Deposit Insurance Corp., the bank watchdog. In August, the FDIC noted that offices stood among the riskiest property types, along with hotel and retail sectors, and reported plans to heighten scrutiny of commercial real estate credit in upcoming reviews.

Nonbank real estate lenders such as debt funds, mortgage real estate investment trusts and life insurers also are looking to cut their risk.

One loan that’s been tested in the market is backed by 450 5th St. NW in Washington, a building that’s occupied by the Justice Department, which is moving out soon, according to people familiar with the deal. The lender, PGIM, offered below-market rates to subsidize potential buyers of the loan, one of the people said. 

American International Group Inc. has also marketed a loan portfolio with imminent maturities that’s secured by several office properties in the Washington area, according to the people.

A spokesman for PGIM declined to comment. An AIG spokesperson didn’t respond to a request for comment.

`Market is Terrible’

Deals have been slow to reach the market partly because lenders are still trying to assess values for their collateral. This year’s steep drop in building sales means there are fewer benchmarks for pricing, but brokers say they have seen a flood of new requests for loan valuations. 

In another complication, some lenders originated loans early in the year at lower rates that aren’t as attractive to debt buyers seeking yield, according to Josh Zegen, a managing principal at Madison Realty Capital. 

“The market is terrible: If you don’t have to sell something, you shouldn’t be selling it,” Zegen said. “Today’s calls from lenders aren’t as urgent yet, but in a slowing market, where they’re not receiving repayments as expected, the calls will become more urgent over time.”

The few deals that are trickling out are reflecting major price declines. A slice of debt on a midtown Manhattan office tower at 150 E. 42nd St. was offered for about 78 cents on the dollar by John Devaney, a trader of distressed commercial mortgage-backed securities. The loan is current and performing, but its price plunged in September. 

“This is really the first of some bonds that now have traded down,” Devaney said. “This was trading in the low 90s.”

The situation will become more urgent with a wave of loans — many backed by buildings with growing vacancies — that are set to mature in the coming years, and few lenders willing to take on more office debt. 

“Unfortunately for legacy office assets we own that have an impending debt maturity, it’s near impossible to get any kind of refinancing,” said Kaplan of Meadow Partners. “Most existing lenders are not willing to accommodate anything.” 

As pressures mount in the coming quarters, he sees opportunities for firms like his.

“It’s going to get worse before it gets better,” Kaplan said. “We’re trying to be patient and wait for those deals.” 

—With assistance from Hannah Levitt and William Shaw