A recent report reveals that some of the largest banks in the United States are quietly divesting from sectors of the economy facing distress. According to The New York Times, banks are selling commercial real estate loans to “reduce losses.” For instance, Goldman Sachs and Citigroup recently sold part of a $170 million loan secured by office buildings in New York, San Francisco, and Boston.
Additionally, First Capital has sold a $100 million investment portfolio, which includes many loans on New York office buildings. While the loans being sold are insignificant compared to the $2.5 trillion in commercial real estate loans held by all U.S. banks, the shift in strategy is notable.
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The report indicates that these actions reflect some lenders reluctantly acknowledging the strategy of “extend and pretend.” If unsuccessful, many owners, particularly office landlords, could default on mortgage loans. Consequently, significant losses are anticipated for creditors, leading to reduced bank revenues.
“Extend and pretend” was a practice popular during the 2007-2008 global financial crisis, where lenders extended borrowers’ repayment terms to make property values appear stable.
With the rise of remote work, the commercial real estate market is facing challenges. Data from ATOM shows a 117% year-over-year increase in nationwide commercial real estate foreclosures filed in May, totaling 625 cases.
