Banks push past era of office loan weakness as commercial property lending
Two of the largest U.S. banks, Wells Fargo and Bank of America, offered new evidence that business remains solid for their commercial-mortgage customers as the industry moves beyond the post-pandemic era of struggling office loans.
Wells Fargo, based in San Francisco, cut the size of its reserves that it holds against troubled office loans in the second quarter. Charlotte, North Carolina-based Bank of America expanded its commercial real estate lending and recorded virtually no commercial mortgages that went bad during the quarter as a total loss.
The strategic moves by the banks square with the broader trend of a U.S. economy overcoming a slowing job market, rising inflation, overseas military conflicts and an increase in commercial bankruptcies. And the two banks' earnings reports indicate that problems with office-building loans continue to decline.
"There's no systemic issues that we're seeing come through the portfolio," Wells Fargo Chief Financial Officer Mike Santomassimo said during a conference call Tuesday. "There's always individual idiosyncratic issues you might see with an individual borrower," he said. "But, overall, we're seeing really good credit performance."
However, banks are preparing for a large amount of commercial real estate loans coming due. About $875 billion of commercial and multifamily debt is scheduled to mature this year, and an additional $652 billion is set to come due in 2027, the Mortgage Bankers Association said in February.
Bank of America
Bank of America charged off a mere $2 million of commercial real estate loans in the second quarter, compared to $202 million of charge-offs at the same time last year. That came as the bank's loan book bulged, as the average balance of commercial real estate loans and leases it held during the second quarter increased 7% to $70.3 billion from a year earlier.
"Our second-quarter performance reflected strong revenue growth across every business segment," Alastair Borthwick, chief financial officer at Bank of America, said during the call.
Bank of America executives did not address commercial real estate lending specifically during their conference call.
Wells Fargo
Wells Fargo reduced its allowance for losses on commercial real estate loans in the second quarter to $16 million, compared to $61 million in the same period the year prior.
However, Wells Fargo posted softer revenue from commercial real estate in the second quarter, down 1% to $1.19 billion, compared with the same period in 2025. Executives blamed lower interest rates for the revenue decline.
In other words, Wells Fargo completed more real estate deals and lent more against commercial properties, but falling rates squeezed what the bank earned on those balances.
Office loans are now emerging as a source of strength, after years of problems. Wells Fargo increased its reserves for delinquent consumer loans in its credit card and automotive lending businesses. But the higher level of reserves was "largely offset by lower allowance for commercial real estate office loans."
Wells Fargo also flexed its muscle in other segments of commercial real estate finance, with CEO Charlie Scharf ticking through a list of the bank's market-leading positions. Wells Fargo is one of the top banks for packaging commercial mortgages into bonds, arranging large property loans that are shared among lenders and bundling commercial real estate loans for investors.
Still, Scharf tempered the optimism during the call with a warning that "strong environments like this don't last forever," he said. He added that Wells Fargo would "watch carefully for signs of outsized risks and stress."
The results marked the beginning of banks' second-quarter earnings reports, with JPMorgan Chase and Goldman Sachs also issuing reports. Commercial real estate accounts for a much smaller share of business at JPMorgan Chase and Goldman Sachs, and those two banks typically disclose little or no information about commercial real estate lending.
JPMorgan Chase said Tuesday it posted record profit in the second quarter on higher trading volume, though the nation's largest bank didn't provide details on its commercial real estate lending.
Four additional large banks report second-quarter earnings on Wednesday: PNC Financial Services Group, M&T Bank, First Horizon and Morgan Stanley.
(CoStar News | By Andy Peters, Mark Heschmeyer)
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