The strained office segment continues to drive commercial real estate woes, bank CFOs said Tuesday during investor conference appearances.

While “side-of-the-highway-type office buildings” — many of which are owner-occupied and encompass smaller loans — are performing well for Wells Fargo, there is a strain in the institutional office space, CFO Mike Santomassimo said during a Morgan Stanley conference. 

“You go to Hudson Yards in New York City, they’re doing really well; you go to Times Square in New York City, not doing as well,” he said. “Older office buildings that are not renovated in certain areas of different cities are the places that you’re seeing the most stress.” 

For Wells Fargo, commercial real estate makes up about 16% of total loans. Multifamily properties make up the biggest piece of that, at a little over $40 billion in outstanding loans, and delinquencies are low in that category, he said.

Earlier this year, Santomassimo characterized efforts to ease pressure in the CRE sector as a “long movie” that is just “a little past the opening credits.” Office loans in cities have become a pain point for banks — especially regional lenders — in the wake of the COVID-19 pandemic. The rise of hybrid and remote work has led companies to reduce their footprints or pursue new properties in an effort to draw workers back to the office.

Rising vacancies have tanked office property values, spurring a souring of CRE loans. Higher interest rates have pushed up borrowing costs just as many loans are set to come to maturity and need to be refinanced. Loan performance is set to further weaken in the CRE office segment through 2025, Fitch Ratings said Friday. 

The threat of losses poses particular concern for banks with high CRE concentration. About two-thirds of all CRE loans are held by banks with less than $100 billion in assets, according to a May blog post from the Federal Reserve Bank of St. Louis. Lenders such as New York Community Bank and WaFd have sought to prune their CRE exposure by selling loans to bigger banks. 

San Francisco-based Wells has an 11% coverage ratio for that institutional office segment of the portfolio, where it has experienced some charge-offs, Santomassimo said.

“It’s going to take some time to play out as we go,” he said.

PNC CFO Robert Reilly shared similar sentiments on CRE during his appearance at the conference later Tuesday.

“Office is where the pressure is,” he said. 

Within that, “it’s the multi-tenant office piece for us, where we see the most pressure and where we’re seeing the losses that have occurred and where we expect charge-offs to continue,” he said.

In that segment, the Pittsburgh-based super-regional’s exposure is just under $5 billion, Reilly said. PNC is adequately reserved, at about 14.5% against that loan book, he said. The bank reserved against the roughly one-quarter of loans at higher risk of default, he noted. Those loans haven’t yet hit nonperforming or charge-off status, but it is expected, he added.

For PNC, about 42% of office loans are maturing in the next year. As loans have come to maturity, about half have been repaid or refinanced because borrowers qualified and extended the loans. 

“The other half is where the work is,” Reilly said.

About three-quarters of that portion gets arranged as a new deal with more support or collateral, and the balance is nonperforming loans and probably charge-offs, he added. 

PNC often fields questions on its CRE office exposure and how it’s working through issues, Reilly said. “We’re probably about a third of the way through the game,” Reilly said. “We’ll work through it.”

Charlotte, North Carolina-based Truist has sought to be “a little more cautious” in CRE, especially in the office sector, CFO Mike Maguire said during a Tuesday appearance at the conference.

Of the bank’s $5 billion office loans portfolio, about 30% have been labeled as higher default risk, he said.

“A lot of those deals are still paying as planned, and as contracted, but we do see, for one reason or another, reason to be working more closely with those borrowers," he said.