When FS Credit Real Estate Income Trust bought $351.8 million in loans from a bank rebalancing property loan holdings, it marked more than just another deal. It was part of a growing trend among U.S. banks shedding debt tied to lower-valued real estate because of higher interest rates.

The purchase by the commercial mortgage real estate investment trust comes as two-thirds of banks have increased their capital reserves to cover potential property loan losses, according to Morgan Stanley Research. The higher interest rates are driving down values because of the increased borrowing costs that could be involved in any purchase.

Some of the first banks to report second-quarter results in recent days are showing how those reserves are mounting. Wells Fargo reported wider losses related to office properties, while JPMorgan Chase disclosed a higher level of net charge-offs in its commercial and investment banking business, about half of which were for office-property mortgages.

That has more banks discarding long-held investment strategies and looking to unload some commercial real estate debt to lower their risks some loans would underperform. Investment giant Blackstone, a firm that is closely watched to see which way market winds are blowing, has been a buyer.

A trickle of such sales have been completed in recent weeks and could be a sign of more to come in the next couple of years, according to analysts.

“Given heightened regulatory focus on outsized [commercial real estate] exposure we expect banks that have higher [commercial real estate] concentration both within and outside our coverage group will reduce their concentration over time,” Morgan Stanley analysts wrote in a recent report. That's because it takes time for current loans to mature and for potential losses to emerge, the investment bank said.

For its part, FS Credit REIT saw a chance to use the desire of banks to reduce risk to expand its holdings.

“This transaction is indicative of the structural opportunity we continue to see in the market for alternative lenders like FS Credit REIT as banks and other lenders remain constrained or seek to rebalance their CRE holdings,” Rob Lawrence, global head of real estate at FS Investments, said in a statement. “The loan portfolio is highly complementary to FS Credit REIT’s existing portfolio.”

As of May 31, the Philadelphia-based firm's portfolio was weighted to multifamily at 56%, followed by hospitality at 13% and industrial at 11%. In the first quarter, the REIT’s $237 million in origination activity all involved industrial properties.

The May 31 portfolio allocation "reflects our view that these sectors are well-positioned to benefit from long-term structural trends such as the record-high cost of homeownership (multifamily), return of business and leisure travel (hospitality), and continued demand for technologically advanced warehouse space (industrial),” the REIT said.

FS Credit REIT’s loan purchase follows an announcement late last month by Washington Federal Bank that it sold $2.8 billion of multifamily loans to Bank of America, which in turn is selling the loans to funds managed by Pacific Investment Management Co., better known as PIMCO.

Late in May, Blackstone purchased a billion-dollar senior mortgage portfolio of 11 loans from Deutsche Pfandbriefbank. The loans are secured against performing multifamily, office and hospitality properties.

Despite the notable deals, John Howley, vice chairman of capital markets for Newmark, told CoStar News in an interview that banks still seem to be reluctant to put their commercial real estate loan portfolios on the market. There are entities with money to spend, but there are still financial and procedural obstacles for the sellers to overcome, he said.

“Banks aren’t willing sellers these days,” Howley said. “I think it's hard for the banks to rip the Band-Aid off.”

A sale could force a write-down in their asset values, he said.

It also takes time to get the approval on these larger deals, Howley said.

“By the time you get the approval, other tenants may have moved out, the roof started leaking, etc.,” he said. “It just happens with the bigger loans and because there are multiple decisionmakers.”

While there is a reluctance to sell, according to Howley, there is growing consternation in the banking world over commercial real estate loan portfolios, particularly around small-dollar balance multifamily debt and office property financing.

“There’s lots of conversations, but not a lot of action,” Howley said. “I don't think there's going to be anything done till after the elections.”

Howley said federal banking regulators may step in more aggressively to write down the value of some bank’s loans.

The portfolio acquired by FS Credit REIT is diversified across 16 performing floating-rate loans with an original weighted average loan-to-value of about 61%, an in-place debt yield of over 10% and a weighted average spread that generates an attractive all-in yield.

The REIT "entered the current cycle with a strong liquidity position in anticipation of opportunities that might arise as markets adjust to the higher interest rate environment,” Chris Condelles, chief financial officer of FS Credit REIT, said in a statement. “Periods of dislocation often present opportunities to acquire quality assets at highly attractive terms.”

FS Credit REIT declined to disclose the identity of the seller bank to CoStar News or provide any further comment on the deal. However, New York City Department of Finance records show that last month M&T Bank transferred a bundle of mortgages to FS Credit REIT backed by properties in Manhattan, Queens and the Bronx.

M&T Bank didn't respond to a request from CoStar News to comment.

Following the purchase, FS Credit REIT now manages $9.1 billion in assets across 153 loans, according to the firm.