Wells Fargo & Co. Chief Executive Office Charlie Scharf said there are significant risks to segments of the US office sector and that his bank will see losses stemming from real estate loans.

“We look city by city, we look property by property to look at our exposures, and I would say there’s no question that there will be losses,” Scharf said Wednesday at a conference hosted by AllianceBernstein Holding LP. The San Francisco-based bank is proactively managing its loan portfolio and working with borrowers to restructure terms with the goal of helping clients and minimizing risk, he said. 

Many office owners are struggling amid the rise in remote work and the surge in borrowing costs, which has made financing more difficult. Landlords such as Columbia Property Trust, owned by funds managed by Pacific Investment Management Co., have defaulted on office debt, often in a bid to renegotiate terms with lenders. Brookfield Corp. recently handed over control of a building in downtown Los Angeles to a receiver after it stopped payments on the office tower.

“If you’re reserving conservatively, then you’ve derisked the financial impact to the company,” Scharf said, noting that Wells Fargo has a little less than 6% reserve coverage in its office portfolio. “In the context of the overall portfolio and the overall size of our loan portfolio in the company, we’re not overly concentrated in office.”

Eoin Treacy's view

I was speaking with a friend in San Francisco recently who related the story of a major landmark office building. The building had leased at $1000 a square foot before the pandemic. Today it is vacant despite rates having fallen to $200 and there is speculation it will eventually lease for $100. The cost of retrofitting the building to make it residential is $750 and the cost to knock it and completely rebuild is also $750. That’s a white elephant project no one is going to touch and it is only one example.

I have no doubt there will be bargains in the commercial real estate sector but not before current underwater investors are wiped out. The timing of commercial real estate loans is the primary choke point. Early investors have cushions of capital to wait out the downturn. Recent investors, those buying from 2018 onwards are sitting on potentially huge losses.
Wells Fargo is distributing below the 200-day MA
Brookfield has been trending lower in a consistent manner for 18-months.
Blackstone were early investors in residential real estate and that has held up. The share has been ranging, albeit with a downward bias, above the $80 for eight months. A break in the sequence of lower rally highs will be required to signal a change of trend.