Banks detail office exposure; several report Q2 pullbacks

Several US banks decreased their exposure to office loans in the second quarter.

Among the largest declines, Webster Financial Corp. cut its office portfolio by 9.5% to $1.3 billion while Western Alliance Bancorp. reduced its office book by 9.1% to $2.3 billion, according to S&P Global Market Intelligence data.

Wells Fargo & Co., which reported $33.1 billion in commercial real estate (CRE) office loans in its quarterly earnings filing, trimmed its reported exposure to the property sector by 7.2% sequentially due to a reclassification of a portion of its CRE portfolio to better match regulatory reporting guidance.

The reductions came as regulators and investors cast a more critical eye on banks' CRE holdings, especially those secured by office properties, which have struggled to maintain occupancies and revenue as many corporate employees are working at home more frequently.

Some banks have opted to sell office loans in recent months, and still more have considered such transactions but have held off in the face of depressed valuations, market participants said.

Several pullbacks

Among banks that detailed their office loan holdings in second-quarter earnings reports, most opted to decrease or maintain their exposure to the sector, including Bank of America Corp., PNC Financial Services Group Inc. and Citizens Financial Group Inc., which each reported slight declines in office exposure, and Columbia Banking System Inc., Synovus Financial Corp. and Fifth Third Bancorp, which held theirs steady.

Exceptions included Pinnacle Financial Partners Inc., Amerant Bancorp Inc. and United Community Banks Inc., each of which enlarged their office books quarter over quarter.

Heritage Financial Corp., with 13.4% of its gross loans in the office sector, decreased its exposure by 2.3% while Independent Bank Corp., which had an 11.8% office concentration, grew its loans in the sector by 0.5%.

Detailed disclosures

In reporting their office loan portfolios, some banks provided additional details, including their relative concentrations in owner-occupied properties, construction loans and suburban geographies as well as their loans' maturity schedules and asset quality data.

Different types of real estate loans typically carry different levels of risk, even within a property sector, with construction loans generally having shorter durations and elevated levels of uncertainty compared to loans on stabilized properties.

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Investors' views of urban versus suburban loans also have varied in recent years. Before 2020, many market participants considered suburban properties a greater risk because of softer demand compared to central business district properties in established metro areas, which were thought to be more predictable over time.

The work-from-home trend upended that dynamic in some situations as some investors came to believe that properties requiring shorter commutes would be more likely to attract tenants.