Banks report continued pain on commercial real estate loans

investing.com:

By Matt Tracy

(Reuters) — A number of U.S. banks saw continued pain in the third quarter on delinquent commercial real estate (CRE) loans in their portfolios, as stress in the sector persists.

Building owners that borrowed money to finance their properties are being squeezed by high interest rates and vacant offices as workers opt to work from home. Weak demand for offices could trigger a wave of borrowers to default on their loans and put pressure on banks and other lenders, which are hoping to avoid selling loans at significant discounts.

As a result, banks recorded continued provisions for credit losses and charge-offs from the previous quarter, driven by their non-performing (NPL), or delinquent, CRE loans.

«This is going to go on for at least a year, where NPLs continue to rise, followed by charge-offs — it's going to be really ugly,» said Rebel Cole, a finance professor at Florida Atlantic University.

I'm sure that banks are trying to avoid selling their worst properties because that's going to force them to take a larger write-off, and because every property that's sold becomes a comparable sale for the appraisers that value the properties. "

In its third quarter earnings release, Morgan Stanley noted it set aside $134 million for credit losses. Similar to the $161 million it set aside in the second quarter, the bank noted this was due to «deteriorating conditions in the commercial real estate sector.»

Other banks' earnings in the past week showed similar challenges facing CRE holdings. On Tuesday, Goldman Sachs disclosed that it had reduced its exposure to office-related CRE holdings by roughly 50% this year.

Bank of America on Tuesday reported its non-performing loans, or those with at least 90 days of payments