(Bloomberg) -- Major US banks are warning about the potential for further losses across their commercial real estate lending businesses.
JPMorgan Chase & Co. and Wells Fargo & Co. boosted allowances for losses tied to commercial-property loans in the second quarter, driven mostly by their exposure to offices, according to earnings releases Friday. Wells Fargo flagged a $949 million increase in their credit loss allowance, primarily for office loans.
Office lenders are bracing for potential losses as property owners grapple with higher borrowing costs and lower demand from tenants given the rise in remote work and layoffs. Even the largest landlords including Blackstone Inc. and Brookfield Asset Management Ltd. are getting caught up in the shift.
Some owners are defaulting on loans, often in an attempt to kickstart renegotiations with lenders.
For Wells Fargo, offices represent about 22% of the lender’s outstanding commercial-property loans, though the bank said that it hasn’t seen major losses yet.
“The losses are still quite small,” Chief Financial Officer Michael Santomassimo said on a call Friday. “We do expect that there will be more weakness in the market, and it’s going to take a while to play out.”
JPMorgan’s commercial banking business set aside $389 million for reserves due partially to updates in assumptions for office real estate.
Still, the bank’s exposure to the property type is “quite small,” Chief Financial Officer Jeremy Barnum said on the bank’s earnings call.
About $189 billion in debt on US office real estate needs to be extended or refinanced in 2023, half of which was borrowed from banks, according to the Mortgage Bankers Association. US office prices have fallen 31% through June from their 2022 peak, according to Green Street.
--With assistance from Felice Maranz and John Gittelsohn.
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