The Continued Rise in Office Property Distress Prompts U.S. Bank Charge-Offs
The results of the Federal Reserve’s 2024 annual supervisory stress test released in June indicated that the “nation’s largest 31 banks have sufficient capital to absorb nearly $685 billion in losses and continue lending.” However, the “severely adverse scenario for 2024 features heightened stress in commercial real estate, including a 40% decline in real estate prices, with the projected loss rate for banks standing at $77 billion, making large bank exposure to commercial real estate an area of focus for Fed supervisors. The continued mounting office property distress has prompted two of the nation’s major banks to take further financial steps to deal with it. Among the first to disclose second quarter results, Wells Fargo charged off $84 million in commercial real estate loans during the period, bringing the California-based lender’s total charge-offs to $271 million. Although the bank has reduced its office loan exposure from “13% of loan volume a year earlier to 9% this past quarter,” Wells Fargo saw a 5% increase, or $410 million in its nonperforming assets quarter-over-quarter, “driven by higher business property nonaccrual loans, predominantly in its office portfolio.” JPMorgan Chase reported “$164 million of net charge-offs in its commercial and investment banking business, of which about half was for office commercial real estate loans,” representing a significant increase of the $32 million charge off made by the lender in the previous quarter.