The nation’s banks are anxious about getting loans repaid that are secured against empty office buildings, hotels and malls.
Disclosure of these so-called criticized loans, which are warning signs about a borrower’s ability to pay, revealed of the 10 banks that have seen the largest increases, criticized loans have risen by 62 percent in the second quarter (Q2).
Criticized commercial real estate loans soared by 144 percent, to $26 billion, according to an analysis by the Financial Times.
This comes as many hotels have occupancy rates in the single digits, shopping mall traffic remains low and office workers work remotely. These results have led to tenants who missed rent payments and commercial landlords struggling to make mortgage payments.
The banks with the largest total increases include JPMorgan Chase, Bank of America and Wells Fargo.
“People are looking pretty closely at criticized loans, particularly CRE [commercial real estate] loans,” Brian Foran, a bank analyst at Autonomous Research, the London-based independent research firm covering the financial services industry, told the FT, “Because they’ve looked around the city and noticed it’s pretty empty.”
The Federal Reserve has reported U.S. banks have added $111 billion to their loan loss reserves since the beginning of the year.
“The banks are betting hard that they will be fine because the loan-to-value ratio is 50 percent,” Foran said. “But the problem is, that was the loan-to-value from January.”
Buffalo’s M&T Bank has seen the largest increase in criticized loans because nearly 40 percent of its loans are in CRE, mostly in New York City. These loans swelled 156 percent in Q2, and criticized CRE loans at the bank almost quadrupled to $3.2 billion.
Last month, CRE investors, who say they have been patient with missed payments as COVID-19 emptied malls and office buildings, began to push back.
Unwilling to risk any more financial losses, real estate investors, including hedge funds and private equity firms, are taking property owners and developers to court, looking to foreclose on loans to minimize their financial losses.
“When this all started in March, the first reaction was this was temporary and let’s just see how this plays out,” H. Scott Miller, a real estate lawyer with Carlton Fields, a Florida law firm, told the New York Times. “But we’re getting to the point where people are saying, ‘How much longer can this continue?’ This just can’t be open-ended.”