The country’s largest banks that are most active in commercial real estate lending have softened their strong support for property purchases in recent months, with CoStar data showing a particularly steep drop in office and apartment financing.

The trend is likely to extend into this year, based on comments from bank executives who singled out office properties for weakness in their earnings reports this month.

While office building sales in 2022 accounted for 13% of total transactions, CoStar data shows, those sales were down 35% in the second half from the first half. Meanwhile, the largest banks financed 47% fewer office deals in the last six months of the year.

“The office market is showing signs of weakness due to weak demand, leading to higher vacancy rates and deteriorating operating performance, as well as challenging economic and capital market conditions,” said Mike Santomassimo, Wells’ chief financial officer. Fargo, on the bank’s earnings call. In the past week. “While we have not yet seen this translate into significant loss content, we expect to see stress over time and are proactively working with borrowers to manage our exposure and be disciplined in our underwriting standards with outstanding balances and credits. reduced compared to a year ago.”

The weakness is widespread even in Class A properties where Wells Fargo has originated loans.

“We are very attentive to cities like San Francisco, like Los Angeles, like Washington, DC, where we see that rental rates in general are much lower than other cities in the country,” added Santomassimo. “Those are markets that we watch very closely and make sure to be proactive with our borrowers to make sure that we are thinking well ahead of any expiration or extension options that need to be put in place to help. manage through it.”

The data is the result of a review of the largest 2022 financed property sales by the largest U.S. banks as tracked by CoStar, and additional lending activity may have occurred last year that was not accounted for. collected in the data. Based on last year’s totals, retail and data center lending are shaping up to be potential bright spots for the financial industry in 2023.

In the analysis, Wells Fargo was among the most active bank lenders and had the highest loan totals in both the apartment and industrial sectors. That’s a focus that began for Wells Fargo in 2021, Nipul Patel, director of real estate banking within Wells Fargo’s commercial real estate group, told CoStar News in an interview.

The strength of activity in the two sectors peaked in the first quarter of 2022, according to Patel.

Wells Fargo’s Nipul Patel projected weaker lending activity in apartment, industrial and office properties. (Wells Fargo)

CoStar data shows that apartment property sales were 18% lower in the second half of the year than in the first half. The largest banks financed 42% fewer apartment deals in the second half.

“Most of the second half of the year was pretty quiet on new origination activity in both the multi-family and industrial sectors,” Patel said.

That pause is likely to continue into early this year given high interest rates and price discovery with those types of properties, he said.

Some of the country’s other big banks reported increases in some apartment types during their earnings reports.

JPMorgan Chase’s commercial real estate loans rose 2% quarter-over-quarter, reflecting a slower pace of growth than at the start of the year due to higher rates, affecting both originations and prepaid activity, the company said. bank.

“The vast majority of commercial real estate loan balances are for affordable multi-family housing, which is fairly safe from a credit perspective for a variety of reasons,” Jeremy Barnum, JPMorgan’s chief financial officer, said on the call. “So, we’re pretty comfortable with the loss profile of that business.”

San Francisco-based First Republic Bank backed more apartment deals in 2022 than other types of properties. The bank reported achieving a record volume of apartment loans in 2022.

First Republic said it expects to continue that loan growth in 2023; however, it maintains conservative underwriting standards. The average loan-to-value ratio for all real estate loans it originated during the year was 57%, the bank said. Loans with that approximate LTV ratio are generally considered low risk.

Where the funding outlook is brightest by property type is in retail, particularly properties like grocery centers and also data centers, Wells Fargo’s Patel said.

CoStar data shows that funding began to pick up in the second half of 2022 from the largest banks in the retail and specialty sectors. Retail lending from the largest banks rose 63% in the second half of the year, despite transactional activity falling 26% in the sector.

For specialty properties, such as data centers and self-storage properties, loans are up nearly 174%, according to CoStar data. Sales of specialty properties increased by almost the same percentage in the second half of the year as in the first half.