Office landlords and lenders are experiencing a strain in their relationship, but federal regulators would very much like the two sides to work it out.
Regulators released new guidance last week, calling on financial firms to “work prudently and constructively” with credit-worthy borrowers in commercial real estate, Bloomberg reported. The guidance was issued by the Federal Reserve, the Federal Deposit Insurance Corp. and others, updating a recommendation on workouts issued during the Financial Crisis.
The bank regulators are asking financial institutions to grant short-term loan accommodations to their struggling borrowers. Some of the ways could include deferring payments, accepting partial payments or providing assistance through other means.
The guidance comes as a pile of commercial real estate debt comes due during a nationwide downsizing by office tenants. Nearly $400 billion in commercial real estate debt is maturing this year. While much of that is for office landlords, other property sectors are also in distress, including multifamily owners facing a big impact in the fall.
By 2027, $1.4 trillion in commercial real estate debt will mature, according to Trepp. Banks account for more than half of commercial real estate lending, according to Citigroup analysis reported by Reuters.
Workout specialists have caught wind of a shifting approach from banks, who have long favored the extend-and-pretend approach, hoping struggling assets will turn around. These days, they are ripping off the bandage instead, aiming to cut losses rather than face a larger write-down later.
Banks tend to avoid realizing defaults because that forces them to mark loans to market value, a hit to the bottom line. But they are beginning to acknowledge that the office market may never recover.
But regulators’ guidance is just that: guidance. They cannot compel banks to treat borrowers in a favorable way.
— Holden Walter-Warner
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