Banks Report Fewer Bad Loans… For Now
Bad debt on bank balance sheets ticked down again in 2022, but the data belies a wave of loans maturing this year that could translate to distressed offerings for equity buyers.
Just $10.4 billion of commercial, multifamily and construction/land loans held by the top 300 banks were nonperforming at yearend, according to Trepp Bank Navigator. That’s 0.5% of total loan holdings, down slightly from 0.6% in 2021, when nonperforming debt totaled $11.9 billion. The top 300 banks had only $1.1 billion of foreclosed properties on their books at yearend, down nearly 17% from $1.3 billion the year before.
As a share of overall holdings, nonperforming loans haven’t accounted for 1% of bank loans since 2015, but market pros say that’s about to change.
Trepp estimates that about $80 billion of bank office loans will come due this year. “Those are all loans that if the lender could step away from … they would love to,” Trepp managing director Matt Anderson said. “The current lenders are faced with needing to either refinance those loans or look at those as heading to default and taking a loss on it.”
Anderson noted that some of those loans will have suffered occupancy and/or income loss, “so even if the lender comes back in with a stapled loan to help keep it afloat, it’s going to be on lower terms, so there’s probably going to be some losses there regardless.”
He added that while bank balance sheets looked strong at yearend, nonperforming loans are a lagging indicator. “It takes a while for actual problems … to then show up in the delinquencies and defaults,” he said. “Then it takes another little while for that to flow into nonperforming loans and foreclosures and REO.”
Opportunistic buyers already are disappointed at the lack of distressed debt being shopped by bankers and borrowers.
Potential trades are being thwarted by a wide bid-ask spread, said Raymond Chalme, chief executive of Broad Street Development who recently launched Paradigm Advisory Group to work with lenders, servicers and property owners dealing with distressed office and apartment properties in New York. That gap “has to move to kind of establish the next layer of watermark,” he said.
“A lot of the equity is probably out of the money,” he added. “A lot of [preferred equity] and [mezzanine financing] is somewhere out of the money, and we’re trying to see where that is.”
Nick Seidenberg, a managing director and loan-sales specialist at Eastdil Secured, said that headlines about commercial real estate are overstating the risk in the market. While office buildings are facing a secular shift in usage and value, the industrial, multifamily and retail sectors remain strong, as do niche property types like student and senior housing and data centers.
“The real distress is on the office side,” he said. “The main difference in office versus all these other asset classes is the re-tenanting cost and the cost to stabilize is so significant.” While staggered maturities and in-place leases may delay trouble for some office properties, chances to buy those buildings at discounts eventually will emerge, Seidenberg said.
He said that, since January, Eastdil has provided lenders broker opinions of value on roughly $16 billion of properties, 80% of which were office properties. “So that’s where the activity will be from, whether loan sales or short sales,” Seidenberg said. “There’s going to be a lot of opportunity for buyers to buy office buildings at a reset basis.”
Trepp’s Anderson said that how much distress eventually emerges will be proportional to how hard a line banks take with their borrowers.
“We all learned a strange lesson from the [global] financial crisis, which was that extend and pretend seemed to work,” he said. “So for the banking industry broadly and all sorts of individual players, when they really rolled up their sleeves and made as many accommodations as they could to keep loans and borrowers afloat, that worked out.”
For a list of the Top 40 Banks in Nonperforming Real Estate Loans at Yearend 2022, contact Green Street News.
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