Bank Exposure to Office Sector is Less than 4%

The bank “crisis” in the office sector is not necessarily as extreme as some make it, according to Alan Pontius, National Director, Office and Industrial Division, Marcus & Millichap.

Speaking during a news video produced by his firm, Pontius said bank exposure to commercial real estate debt is only 25% of the entire banking system’s total loan portfolio.

If you look further at office debt as a percentage of that commercial real estate, it’s just under 15%, meaning that bank exposure to office loans within their entire portfolio of debt is less than 4%.

“So, when you consider that total exposure to office loans within the banking system is less than 4%, that would suggest that by the statistics anyway, that the risk factors are overstated.”

Pontius then broke that down based on vintage, pointing to big differences in performance based on whether it’s a suburban asset or an urban asset.

The average vacancy for assets across the country constructed after 2010 is roughly 12% while for those constructed in the 1980s, it’s 20%, even higher than 20% on the averages in the urban core.

“So there is no question that vintage matters and there is no question that older assets are going to have to be retrofitted, modernized in order to compete for tenants in the world we’re in today,” Pontius said.

Pontius then compared suburban office assets’ performance compared to those in the urban core.

“That question has plenty of complexity to it,” he said, “starting with demographics. The Millennial population, the largest population we’ve ever had, is aging and clearly looking for space and other things that suburban locations provide.

“But also, you have to look at who occupies suburban buildings versus the city core. The city core has a lot of very large major corporations, those with 300,000 square foot footprints and above.

“While those same types of footprints can exist in the suburban core, you see a very wide swath of smaller and mid-sized companies – companies of a thousand employees and below.

“But if you look closely at company size, we’re now seeing a distinctive return to work with the average days in the office ranging from 3.6 to 3.8.”

While some headlines would suggest the banks have significant exposure to office debt, Pontius contends that the stats don’t really match the headlines.