Several of the U.S. banks with the highest proportional exposure to loans backed by office real estate properties increased their lending in the sector during the third quarter despite continued market concern over the future of office work.

At Synovus Financial Corp., where office loans represented 6.8% of gross loans in the third quarter, office exposure rose by 9.9% sequentially during the period. At Cathay General Bancorp, where office loans were 7.9% of gross loans, office exposure rose by 4.2%. Both banks were part of an analysis by S&P Global Market Intelligence of 15 banks that disclosed outstanding exposure to the office sector of at least $500 million as of Sept. 30.

Ameris Bancorp, with roughly $1.25 billion of outstanding office loans representing 6.5% of its gross loans, grew its office exposure by 12.6% sequentially in the third quarter, for the largest increase in the group. Simmons First National Corp., with roughly $993.0 million of office loans representing 6.4% of gross loans, posted a 7.8% increase.

Heritage Financial Corp., where office loans represented 14.2% of gross loans, grew its office loan book by 3.0% in the quarter, while Columbia Banking System Inc., where office loans accounted for 11.2% of gross loans, ramped up its office exposure by 1.9%.

Market skepticism

Wells Fargo & Co., the bank in the group with the largest office exposure — $35.2 billion, representing 3.7% of gross loans — trimmed its exposure by 2.7% in the quarter. East West Bancorp Inc., another major office lender, trimmed its exposure to the sector by 3.5% sequentially in the quarter to $2.95 billion.

Prosperity Bancshares Inc. shrunk its office lending book by 7.0% in the quarter to roughly $941 million, or 5.1% of gross loans. Among the U.S. banks with the highest reported exposure to office loans, CVB Financial Corp. trimmed its office lending by 1.1% to $1.11 billion, or 12.6% of gross loans.

Real estate investment trust analysts at Compass Point Research & Trading said in a Nov. 14 note that shares of publicly traded owners of central business district office properties were down 32.2% on a total return basis in 2022. Shares of suburban office owners were down 21.2%.

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Suburban office owners were trading at a 29.0% discount to net asset value and central business district owners were trading at a 32.1% discount. The apparently discounted share prices could be "a mirage and a value trap," the analysts, Floris van Dijkum and Merrill Ross, argued, noting long-term headwinds facing the office sector.

In particular, they wrote, current office vacancy rates are high, at 18.9% according to Jones Lang LaSalle data, while office demand is expected to decline permanently by 15% to 25% as more employees work from home. Bloomberg News reported Nov. 11 that some of the largest lenders to U.S. office owners, including JPMorgan Chase & Co., Deutsche Bank AG and Barclays PLC are considering selling off loans on the properties.

Unsettled leasing

Some large owners of office real estate maintain that there are signs of improvement in office leasing following the downturn during the COVID-19 pandemic.

"The success in the market this year has been driven largely by the bigger tenants," SL Green Realty Corp. Director of Leasing & Real Property Steven Durels said on an Oct. 20 earnings call. "And as the big guys are bringing their employees back to the office, you're now seeing those smaller guys follow them into the office, and that's driving a lot more leasing activity."

In the company's New York submarkets, Durels added, "Most businesses are still very unsettled about what their ultimate footprint is going to be. They just don't know. So they're building in a lot of flexibility on ability to grow and ability to downsize as time goes by, because the world is still figuring itself out."