More banks will consider asset sales or turn to merger-and-acquisition solutions as they seek to work through issues in their commercial real estate portfolio, financial industry experts said.
There were a number of recent moves in that direction. Earlier this month, The Bancorp completed the sale of $82 million of real estate bridge loans collateralized by apartment properties after months of negotiation.
According to the $8.1 billion-asset, Wilmington, Delaware-based company, the transaction included foreclosed and classified assets. It featured the reversal of $1.26 million in accrued interest but no loss of principal.
While The Bancorp provided financing, an unnamed third-party purchaser offered a 25% payment guarantee. The Bancorp termed the sale "an indication of the liquidity" of the purchased loans in a Securities and Exchange Commission filing. The Bancorp officials did not respond to a request for comment.
The Bancorp's disclosure came a week after the Seattle-based HomeStreet Inc.
Similar to The Bancorp, Valley National characterized the sale of CRE assets for what amounted to a modest haircut as a positive. It "further reflects the strength and desirability of our diverse commercial real estate portfolio," Chairman and CEO Ira Robbins said in a press release. The deal came a month after Valley National
Banking analysts believe there is potential for even more asset sales. Banks are looking to scale back exposure to CRE while investors continue to show an appetite to buy.
"Bank M&A and balance sheet rationalization, especially in light of the recent runup in rates, will significantly increase the supply of bank commercial real estate asset loans and underwater securities being sold, repositioned, or packed in synthetic risk transfer deals," Kevin Stein, a managing director at the Walnut Creek, California-based Klaros Group, wrote to American Banker.
"The private equity world and the private fund world are very active right now looking for bank assets," Chris Marinac, director of research at Janney Montgomery Scott, told American Banker. Transactions may involve haircuts, to be sure, but many banks have already established reserves in anticipation of a sale, Marinac said. "The true loss that's going to flow to the income statement is moderate at worst," he said.
Other analysts, however, painted a bleaker picture. They noted banks are holding plenty of CRE loans that would require a deeper discount to sell. "Some of these credits are never going to work because the underlying fundamentals don't work at the existing basis regardless of the interest rate environment," Keith Botvinik, managing director at Grace Realty Capital in New York, said Wednesday in an interview. "Eventually, this stuff needs to get flushed out."
The recent string of rate cuts during the second half of 2024 won't be enough to fix banks' problems — especially with the likelihood of
Klaros Group Partner Jonah Crane raised the specter of a class of "zombie" banks weighed down by underwater CRE loans. "With interest rates on the rise again, many banks that thought they might weather the storm will see their mark-to-market losses growing again," Crane said in a statement. In extreme cases, impacted banks could "swing for the fences" in a bid to recover. "We could see failures," Crane said.
That such a worst-case scenario hasn't yet materialized is a credit to regulators, who've largely succeeded in keeping emerging CRE problems under control, according to Botvinik. "I think this is being managed very carefully by a lot of different organizations," he said. "The government is very careful not to spook the markets now that the economy is kind of stabilized and moving in a good direction, which is kind of keeping everything afloat."
State and federal banking regulators have long singled out CRE concentration as an area of heightened concern. In December 2006, the Office of the Comptroller of the Currency, Federal Reserve Board and Federal Deposit Insurance Corp. implemented a guideline that subjected banks to greater supervisory scrutiny when their CRE portfolios exceeded 300% of total capital. Concerns mushroomed again in the wake of the COVID-19 pandemic, as more people opted to work from home and shop online, upsetting the dynamics of multiple CRE asset classes.
"There's distress in just about every asset class," Botvinik said. "Nobody is safe ... I see it just about everywhere, not just office … Once there is an event, some kind of increased pressure on lenders, due [perhaps] to cash-flow issues, it's like the little Dutch boy with his finger in the dyke. Then it's going to be really difficult to manage."
Both Botvinik and Marinac said CRE-related pressure could push a number of banks to consider selling themselves, adding fuel to an expected spike in M&A activity in 2025 and offering a possible solution to troubled institutions. "Both parties can mark down their books," Botvinik said. "They don't have to show the public that they've had big issues. It's a good way to deflate the risk in CRE portfolios."
"You're going to see mergers and acquisitions keying off of trying to create more diversity" in banks' loan portfolios, Marinac said.
