Commercial real estate risks remain manageable across most sectors, though office buildings will continue to plague lenders, according to executives at Wells Fargo & Co. and PNC Financial Services Group Inc.
“Most of the portfolio is performing pretty well,” Wells Fargo Chief Financial Officer Mike Santomassimo said at a Morgan Stanley conference Tuesday, citing multifamily residences, data centers, logistics and industrial buildings, and even hotel and retail outlets. Institutional office space is a problem area, although some office buildings are outperforming, he said.
“You go to Hudson Yards in New York City — they’re doing really well,” Santomassimo said. “You go to Times Square in New York City — not doing as well, right? And so older office buildings that are not renovated in certain areas of different cities are the places that you’re seeing the most stress.”
Uncertainty over when the Federal Reserve will cut interest rates has added to the challenges faced by the commercial real estate sector, where high borrowing costs have hammered valuations and triggered defaults, leaving lenders stuck with assets that are tough to sell. Regional banks have been especially hard-hit.
Still, commercial real estate is “fine” outside of office lending, PNC CFO Robert Reilly said at the conference. In the office sector, where most of the stress lies, PNC is working through its loan book and expects charge-offs will occur, he said.
Pacific Investment Management Co. expects more regional bank failures in the US because of a “very high” concentration of troubled commercial real estate loans on their books, John Murray, Pimco’s head of global private commercial real estate team, said in an interview.
This article was provided by Bloomberg News.