In the second half of 2021, concerns about office loans will become serious

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Capital Bancorp operates in Washington DC and its suburbs in Maryland and Virginia. These are some of the most prosperous areas in the country, but also some of the most changes in working life affected by the pandemic

The $ 2.1 billion capital, located in Rockville, Maryland, and many of its peers are likely to move away from certain corners of commercial real estate, perhaps indefinitely, said Edward Barry, president and CEO of the bank.

Office real estate has become the main problem, Barry said. Thousands of businesses in nearly all sectors have successfully migrated to teleworking. The cost savings will surely spur new insights into the merits of office real estate, including in the city center, which supports the surrounding retailers.

“There are homeowners who are starting to worry,” Barry said. “People need less space, which means more and more vacant offices.”

According to research and data from CRE data company Trepp, the average public bank is at least twice as concentrated in commercial real estate as the country’s 30 largest lenders.

Most businesses enter into a lease for one or more years of office property. Payroll protection program loans during the pandemic helped many businesses pay rent. But PPP lending has stopped, and as leases expire, more businesses will need less space and demand lower rents. This will put pressure on homeowners, Barry said, and they, in turn, may find it difficult to pay back their loans.

This trend may appear in the second half of 2021 and next year. creating a headache for banks with a significant impact on the office sector. This is likely to be a key topic in the banks’ second quarter reporting season in July.

“There will be a new norm of more work from home and fewer people in offices,” said Damon DelMonte, analyst at Keefe, Bruyette & Woods. “Although the general opinion is that credit quality holding up very well, it’s definitely fair to have concerns about the offices. “

Loss rates for most banks remained low or only rose gradually during the pandemic, thanks in part to aggressive government stimulus programs in 2020 and rapid recovery of economic activity this year amid successful coronavirus vaccination programs, Del Monte said. More than half of the US adult population is now fully vaccinated. Travel has accelerated, and hotels and other once vulnerable corners of the CRE are rebuilding.

But office buildings could be a ticking time bomb, ultimately leading to loan losses, even if the economy as a whole and banks’ general credit books become healthier.

Moody’s Analytics predicts US CREs will fall 7% between pre-pandemic levels in early 2020 and end 2021. The office and retail sectors will be hit hardest, with 13% declines in this range forecast for offices and offices. almost 17% retail.

Prior to the pandemic, retail was already under strong pressure due to increased online shopping. But the sector’s problems in 2021 may be related to the problems faced by office real estate. When fewer people come to jobs every day, bankers say, the surrounding businesses serving office traffic will inevitably face setbacks as well.

“The office side of CRE is changing slowly, but when people realize they need less space, it will have an impact on retail,” Barry said.

Capital Bancorp ditched office lending and now this corner of CRE has only a few loans. But according to Barry, the bank still has significant contacts with retail, “and we are monitoring this closely as companies emerge from the pandemic: who succeeds? Who won’t start? “

For example, the total vacancy rate in Washington’s CBD hovered around 10% before the pandemic, but surged to nearly 17% in the first quarter of 2021, according to real estate brokerage Colliers International.

At the national level, office loans issued by banks in the first quarter were valued at 35% of the level in the same period in 2019, according to Trepp. This means that the cost of debt for homeowners is on the rise as banks become increasingly wary of office buildings.

Among the loans Trepp tracks, delinquency rates in the office sector remain low, according to Trepp analyst Maximilian Nelson. But it was the only property in which arrears rose in the first quarter, increasing 20 basis points from the previous quarter to 0.7%. The employment data, according to Nelson, is “unclear.” If the clouds darken and occupancy decreases, loan losses could follow.

Kevin Cummings, chairman and chief executive officer of Investors Bancorp, with $ 26.7 billion in assets in Short Hills, New Jersey, said “Overall, things are looking good. The economic momentum is growing very quickly. There is deferred demand, and this is ultimately good for banks. “

But, he added, the pandemic “has made a difference – some things, perhaps for a long time. There will certainly be problems. “



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