Office lenders looking for an exit ramp

Jamie Dimon of JPMorgan Chase, Christian Sewing of Deutsche Bank and Nigel Higgins of Barclays (JPMorgan Chase, Deutsche Bank, Barclays, Getty)

Is the other shoe about to fall on commercial real estate?

In case it does, major commercial property lenders, especially office lenders, are looking to sell their loans in low-demand cities, including New York, Bloomberg reported. JPMorgan Chase, Deutsche Bank and Barclays are among them.

Sign of the motivation of lenders to discharge their debts, some offer discounts ranging from 3% to 25%. Many discussions of the debt sale have taken place behind closed doors, and debt transactions are largely kept away from the public.

Risks faced by lenders include that the properties secured by their loans will not generate enough revenue for their owners to pay the debt service, and that the value of the assets will fall below the loan balance.

“The office in particular is a dirty word for lenders,” Meadow Partners’ Jeff Kaplan told the publication.

Selling loans is part of the normal course of business for banks. What isn’t, however, is the struggle they have to find buyers. Hence the discounts.

Lenders issued $316 billion in commercial loans across the country in the first half of the year, according to the Federal Reserve. But rising interest rates and the distress of some types of commercial properties prompted lenders to backtrack.

Many are reluctant to take on debt, fearing that rising rates and inflation will reduce the value of these loans in the future. Some commercial real estate players are take out variable rate loans rather than locking in fixed rate loans at high interest rates.

Commercial lenders are reacting to falling real estate prices across the sector. Trade prices are down 13 percent from a peak in May, according to the Green Street Commercial Property Price Index. Shopping centers were the hardest hit with a 23% drop, but even industrial prices are down 17% since May.

In the long run, office owners could have the worst of it. A study by Arpit Gupta of NYU and Vrinda Mittal and Stijn Van Nieuwerburgh of Columbia University estimated that by 2029, New York’s office stock decline in value 28%, or $49 billion.

—Holden Walter-Warner

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