US banks scramble to sell off commercial real estate as they brace for losses.

In an effort to lessen their exposure to the shaky commercial real estate market, several US banks are planning to sell off property loans at lower prices even when borrowers are compliant with their payments.

Following several cautions that the asset class is the "inevitable event" in light of the current instability in the US regional banking system, some lenders are now prepared to accept losses on so-called performing real estate loans.

Three sources with knowledge of the situation claim that HSBC USA is winding down direct lending to US property developers by dumping off hundreds of millions of dollars worth of commercial real estate loans, possibly at lower prices.

PacWest, however, lost money last month when it sold $2.6 billion in construction loans. And by altering the way they account for commercial real estate debt, a number of other banks are making it simpler to carry out future transactions of a similar nature.

Banks often don't want to take losses on large amounts of loans that will still have value as long as payments are made on schedule. However, others are being persuaded to make the move due to worries about a rise in delinquencies, particularly for loans secured by office premises, which have seen diminishing demand due to the rise of working from home.

As a result of a slowdown in the demand for commercial mortgage-backed securities, banks of all sizes are now holding onto a greater amount of property debt than they or the authorities would like.

Although the practice of selling performing loans is less common than it was before the 2008 financial crisis, many market players anticipate a rise in the number of agreements this year and the next year.

Banks are using these actions to get rid of the loans as CEOs and regulators express concern about the status of the commercial real estate market.

Charlie Scharf, the chief executive of Wells Fargo, said this week that the bank, which has $142 billion in outstanding commercial real estate loans, is “managing its exposure to the region”. “Without a doubt, losses will occur”, according to Scharf.

Martin Gruenberg, chair of the US Federal Deposit Insurance Corporation, issued a warning this week stating that real estate loans, particularly those backed by offices, may encounter difficulties if demand stays poor and "values continue to soften".

In order to make it simpler to sell the debt later on, some banks are altering how they account for loans by modifying their classification from "hold to maturity" to "available for sale."

Citizens increased its pool of loans available for sale to $1.8 billion during Q1 while lowering its lending for commercial real estate. It does not specify what proportion of such loans are to borrowers of commercial real estate, similar to many other banks.

One loan broker reported that business was booming, with more activity than it had seen in three years, and that it was getting ready to promote numerous agreements in the coming weeks.

Kennedy-Wilson, a real estate investment firm, agreed to pay $2.4 billion, or 92 cents on the dollar, for the collection of PacWest loans, which had a total principal value of $2.6 billion. After PacWest announced the deal, its stock price increased by about 20%.

(Sources: ft.com, hsbc.com)