(Bloomberg) — The U.S. commercial real estate market has been in turmoil since the start of the Covid-19 pandemic. But New York Community Bancorp reminded that some lenders are just starting to see the pain.
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The bank’s decisions to cut dividends and build reserves sent its shares down a record 38% and dragged the regional KBW banking index to its worst day since the collapse of Silicon Valley Bank in last March. Japanese lender Aozora Bank Ltd. added to real estate jitters by warning of a loss linked to investments in U.S. commercial real estate, sending stocks plunging in Asian trading.
This concern reflects the continued decline in commercial property values, coupled with the difficulty of predicting which specific loans might be forgiven. This situation is opened up by the pandemic-induced shift to remote work and rapidly rising interest rates, which have made refinancing more expensive for distressed borrowers. Billionaire investor Barry Sternlicht warned this week that the office market was heading for losses of more than $1 trillion.
For lenders, that means the prospect of further defaults as some landlords struggle to repay their loans or simply move out of buildings.
“This is a major issue for the market to reckon with,” said Harold Bordwin, principal at Keen-Summit Capital Partners LLC in New York, which specializes in renegotiating distressed properties. “Bank balance sheets do not take into account that there is a lot of real estate that will not be profitable at maturity.”
Moody’s Investors Service said it was exploring whether to downgrade New York Community Bancorp’s credit rating to “junk” after Wednesday’s developments.
Read more: NY Community Bancorp plunges as real estate risks shake up the market
Banks will face about $560 billion in commercial real estate maturities by the end of 2025, according to Trepp, representing more than half of the total real estate debt maturing during that period. Regional lenders in particular are more exposed to the sector and likely to be hit harder than their larger counterparts because they do not have large credit card portfolios or investment banking businesses that can protect them.
Commercial real estate loans account for 28.7% of assets at smaller banks, compared to just 6.5% at the largest lenders, according to a JPMorgan Chase & Co. report released in April. The exposure has prompted increased scrutiny from regulators, already on high alert after last year’s regional banking tumult.
As real estate problems, particularly for offices, have emerged in the four years since the pandemic, the real estate market has, in some ways, remained in limbo: transactions have plunged due to uncertainty among buyers and sellers regarding the value of buildings. Now, the need to tackle looming debt maturities – and the prospect of interest rate cuts from the Federal Reserve – are likely to spur more agreements that will clarify the extent of the fall in values.
These declines could be marked. The Aon Center, Los Angeles’ third-tallest office tower, recently sold for $147.8 million, about 45% less than its previous purchase price in 2014.
“The banks – the community banks, the regional banks – were very slow to price things into the market because they didn’t have to, they held them until they matured,” Bordwin said. “They are playing with the real value of these assets. »
Multifamily Loans
The unpredictability of when and where bad mortgages can arise, with some defaults potentially wreaking havoc, is exacerbating the nervousness of smaller lenders. New York Community Bancorp said the increase in chargeoffs was linked to a cooperative building and an office building.
Although office space is a particular area of concern for real estate investors, the company’s biggest real estate exposure comes from multifamily properties, with the bank holding about $37 billion in real estate loans. Nearly half of these loans are secured by rent-regulated buildings, making them vulnerable to New York State regulations passed in 2019 that strictly limit landlords’ ability to raise rents.
Late last year, the Federal Deposit Insurance Corp. took a 39% haircut when it sold about $15 billion worth of loans backed by rent-regulated properties. In another indication of the challenges facing these buildings, about 4.9% of New York City’s rent-stabilized buildings with securitized loans were delinquent in December, triple the rate of other apartment buildings, according to a Trepp analysis based on when the properties were built.
“Conservative lender”
New York Community Bancorp, which acquired part of Signature Bank last year, said Wednesday that 8.3% of its home loans are considered impaired, meaning they are at high risk of default.
“NYCB was a much more conservative lender than Signature Bank,” said David Aviram, principal at Maverick Real Estate Partners. “Yet, given that loans secured by rent-stabilized multifamily properties represent a larger percentage of NYCB’s CRE portfolio compared to its peers, the 2019 rent law change could have a more significant impact.”
Pressure is increasing on banks to reduce their exposure to commercial real estate. Although some banks have backed away from selling large loans due to uncertainty over the past year, they are now expected to market more debt securities as the market thaws.
Canadian Imperial Bank of Commerce recently began marketing loans for distressed U.S. office buildings. While U.S. office lending represents just 1% of its total asset portfolio, CIBC’s profits have been held back by higher provisions for credit losses in this segment.
“The percentage of loans that banks have so far been reported as delinquent represents a drop in the bucket compared to the defaults that will occur throughout 2024 and 2025,” Aviram said. “Banks remain exposed to these significant risks, and potentially lower interest rates next year will not solve the banks’ problems.”
–With help from Sally Bakewell.
(Updated with Aozora Bank real estate warning in second paragraph)
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