Capital One confirms roughly $900 million sale of office loans as property sector wobbles

By Joy Wiltermuth

Investors are circling distressed plays in office properties

Capital One Financial Corp. (COF) confirmed another big sale of nearly a billion dollars worth of office loans as fallout in the sector intensifies in the face of higher interest rates and tumbling property values.

The bank recently sold about $900 million in office loans, a spokeswomen confirmed. Capital One bank declined to provide further detail.

Commercial Observer first reported on the sale, including that it was a "big bet" on the rebound of New York City office properties and naming distressed debt giant Fortress Investment Group as the buyer. Fortress declined to comment.

Distress in the office sector has been a key concern of U.S. banking regulators, including at the Treasury Department and the Federal Reserve, as landlords struggle to financing maturing debt with the central bank's benchmark rate at a 22-year high.

Richard Fairbank, Capital One's chief executive officer, said in a July earnings call that his bank has shed approximately $6 billion of loans over the past few years, adding that it looks to sell assets when it sees credit is worsening in a particular sector.

Capital One reported having roughly $3.6 billion in commercial real-estate loans classified as "held for investment" in the first quarter, but moved $888 million into its "held for sale category in the second quarter, while recognizing a $361 million charge off as part of the transfer.

The portfolio sales comes as corporations have been downsizing their office footprint and struggling since the pandemic to entice more workers back to the office, factors that helped push the national office vacancy rate to a 30-year high of 17.3% at the end of 2022, according to CBRE data.

Sales of properties and related debt have been fairly muted so far in this cycle, outside of the sales of assets seized by three failed banks this spring, but activity in the distressed arena has been picking up in recent weeks, including as office property values in places like San Francisco's financial district have dropped dramatically.

See: 'San Francisco is not dead': Not everyone is shunning the city's reeling office market

Cohen & Steers (CNS), Goldman Sachs (GS), EQT Exeter and BGO, were among the prominent firms The Wall Street Journal recently reported as raising funds to buy troubled properties. Investors see a $1 trillion pile of debt coming due through 2024, as a catalyst for properties to change hands, given a backdrop of sharply higher interest rates.

Related: Don't wait for Fed rate cuts, says debt buyer to banks holding distressed commercial real estate

Stocks SPX DJIA were lower Friday, heading for big weekly losses, as bond yields have shot up, including the 10-year Treasury yield BX:TMUBMUSD10Y hitting 4.307, its highest since 2007 earlier this week.

-Joy Wiltermuth

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08-18-23 1400ET

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