By Gina Heeb

A scrappy Arkansas bank that rose to finance skyscrapers around the U.S. is rethinking just how much to stake its fortunes on commercial real estate.

Bank OZK's obsessive focus on commercial real estate helped it compete with megabanks to fund projects across the New York and Miami skylines. When Wall Street questioned its heavy concentrations of construction and development loans over the years, Chief Executive Officer George Gleason called it an "abnormal phobia" and said the naysayers "will get over it."

Now, dozens of projects that Bank OZK committed to finance are half or almost entirely empty, and the longtime face of commercial real-estate lending is changing its tune.

Bank OZK's new direction reflects a broader pullback by banks in commercial real estate, where elevated interest rates and remote work have battered property incomes and values. Downtowns have continued to struggle with empty office towers, despite early signs of recovery in some parts of the country. Cities including St. Louis have faced a real-estate doom loop in which empty office towers lead to even fewer visitors.

On a call with analysts last month, Gleason said more diversification "will be healthy for our company." The bank has said it is still committed to commercial real estate, but has doubled down on efforts to reduce its reliance on construction and development loans. It wants to offer more plain-vanilla loans to companies and households.

The threat of a recession and higher prices from tariffs have fueled concerns among bank executives and analysts about the ability of borrowers to keep up with loan payments.

"You're essentially in a period OZK has never been in before," said Timur Braziler, an analyst at Wells Fargo.

More than half a trillion dollars in commercial real estate debt that is set to mature between 2025 and 2027 could be "potentially troubled," according to the advisory firm Newmark.

Uncharted territory

Earlier this year, Bank OZK seized roughly half of the land for an embattled project of developer Sterling Bay on the North Side of Chicago that it had committed to finance.

In a statement, Gleason said Bank OZK had "relatively few" foreclosed assets in recent years despite a difficult macroeconomic environment. He has called its commercial real-estate portfolio the most conservative in the industry. The bank has sought to take the lowest-risk position on deals and to keep loan amounts low relative to property values.

"We have built our portfolio with the goal that it will perform well in adverse conditions, and that discipline has been evident in our recent results," Gleason said.

In the first quarter, Bank OZK's real-estate specialties group made up less than two-thirds of its total loans, or roughly $19 billion of them, compared with roughly 70% at its peaks. Gleason, who bought the bank in the late 1970s at the age of 25, has said the group could become less than half the balance sheet, even as it continues to grow by dollar amount.

The bank late last year put a cap of $500 million on new loans and said it would syndicate any over that amount. Large loans can "create a lot of drama," Gleason told analysts at the time. "And we just decided that wasn't worth the headache of having to deal with that sort of crap, honestly," he said.

Even if Bank OZK reaches its targets, it would still have high concentrations of commercial real estate compared with other banks. The real-estate specialties group has long been its moneymaker. The group, which Gleason had packed with attorneys and accountants rather than more-traditional bankers, allowed Bank OZK to command premiums for its expertise.

But its strategy of going after giant, complex commercial real-estate loans has drawn skepticism from the industry and regulators.

Bank OZK doesn't have the steady stream of low-cost deposits many other banks rely on. The Little Rock, Ark.-based bank has instead depended more heavily on certificates of deposit, which pay higher rates and cost the bank more.

Shiny building, no tenants

Commercial real-estate loans are lingering on Bank OZK's balance sheet longer these days, with less refinancing activity in the market. That has allowed the bank to earn additional interest but exposed it to more risk.

Seventeen of the completed projects it committed to finance had vacancy rates of more than 90%, according to Wells Fargo's Braziler. Nearly two dozen had vacancy rates of more than 50%.

A surprise double downgrade to sell by Citigroup about a year ago sent Bank OZK's stock sharply lower. Citi cited in part concern about a San Diego life-sciences project for which the bank had committed to provide $915 million, as well as a multiuse project in Atlanta.

Short interest in Bank OZK has risen sharply since then to 16.5% of float, according to S3 Partners. That makes it the No. 1 short of all U.S.-listed regional banks by that measure, S3 said.

Bank OZK said it recently entered into a contract to sell the land it seized in Chicago, subject to due diligence and closing conditions. It had written down the loan for that project to less than $90 million, a decline of roughly a third from its original value.

Andy Gloor, CEO of Sterling Bay, said in an interview that Lincoln Yards is "definitely a complicated project" but that the company remained committed to it. "It's hour to hour, day to day right now."

Sterling Bay has only built one of the number of office and residential properties it envisioned for the project. That property wasn't part of the recent seizure by the bank.

But Bank OZK is still the lender on the property, a shiny, new, eight-story life-sciences office with zero tenants.

Write to Gina Heeb at gina.heeb@wsj.com

(END) Dow Jones Newswires

May 15, 2025 11:00 ET (15:00 GMT)

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