By Steve Watkins – Staff reporter, Cincinnati Business Courier Jun 27, 2023 Updated Jun 27, 2023, 1:13pm EDT Fifth Third Bank has halted all new office real estate lending. “We are not currently pursuing any new office CRE (commercial real estate) originations,” Tim Spence, CEO of Cincinnati-based Fifth Third, said last week at a Morgan Stanley investor conference in New York. Fifth Third, the largest locally based bank and the 10th-largest U.S.-based consumer bank, had previously cut back significantly on office real estate lending pre-Covid, Spence said. But further weakness in that sector creates risk for banks and prompted it to halt new lending. Fifth Third is in better position than similar banks in exposure to office loans and to commercial real estate in general, Spence said. “We continue to watch it closely but believe the overall impacts for Fifth Third will be limited given that we have maintained the lowest CRE concentration among our peers for many years and had de-emphasized office even before the pandemic,” Spence said. Fifth Third’s office commercial real estate loans total $1.6 billion and make up just 1.3% of its total loan portfolio, the bank said in a presentation accompanying Spence’s appearance at the conference. And commercial real estate as a whole makes up 13% of Fifth Third’s total loans, the lowest percentage when compared with a dozen peers. The office real estate market has slumped since the Covid pandemic prompted employees to work from home and many have continued to do so for some or all of their work week. Nationwide, office leasing volume fell 10.7% in the first quarter this year, according to a report from commercial real estate firm JLL. That marks the third consecutive quarter office leasing has declined. And vacancy rates rose 0.49 percentage points to a record 20.1% in the first quarter, JLL said. Fifth Third is wise to step away from new office real estate loans, Chris Marinac, director of research at Philadelphia-based Janney Montgomery Scott, told me. “There are some secular issues in office and Fifth Third is concerned about where office is going,” Marinac said. “They’re trying to be very careful about not adding more credit problems. We have a very uncertain economy and we have an environment where investors don’t pay for incremental real estate exposure. It doesn’t make any sense to do office loans. “Fifth Third is being honest, being early and not sugarcoating where we are.” The banking industry will likely suffer higher loan losses over the next two to three years than it has in the last three or four years. “That doesn’t mean things will be terrible, but we’ll be getting into a more normalized environment,” Marinac said. “Fifth Third is saying, ‘Office loans have higher losses and probably higher problems. We want less of that and more loans that have a little better risk.' They’ll have problems, but not as many as office.” Marinac figures in the next three years about 20% of all office loans will have some problems getting paid back. Other loans are more in the 10% to 12% range. “If generally speaking office is twice as bad as the rest of the loan book, you want less of that exposure,” Marinac said. “The point they’re making is we don’t want any of this. It’s a very rational way of thinking. My conclusion is they’re not getting paid for it anyway so why take the risk?” Fifth Third’s move will likely be followed by other banks as second-quarter earnings start being reported in mid-July, Marinac said. “I think Fifth Third is probably more open and honest about that sooner than other regional banks,” he said. “Fifth Third tends to be a leader on trends and they tend to be outspoken. The company calls it the way they see it.”