(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 warned that some financial institutions are just beginning to feel the pain.
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The bank's decision to cut dividends and reserve reserves sent its stock price down 38%, giving the KBW Regional Bank Index its worst day since the Silicon Valley Bank collapse last March. Japanese lender Aozora Bank warned of losses related to its investments in U.S. commercial real estate, adding to the turmoil in the real estate market and sending its shares plummeting in Asian trading.
The concerns reflect the ongoing decline in commercial real estate values and the difficulty in predicting which loans will default. The scene is set by the pandemic's shift to remote work and rapidly rising interest rates, making refinancing even more costly for distressed borrowers. Billionaire investor Barry Sternlicht warned this week that the office market is headed for more than $1 trillion in losses.
For lenders, this means the prospect of more defaults as some landlords struggle to pay their loans or walk away from their properties.
“This is a big issue for the market to consider,” said Harold Baudouin, a principal at Keene Summit Capital Partners LLC in New York, which specializes in renegotiating distressed properties. “Bank balance sheets do not take into account the fact that there are large amounts of real estate that cannot be paid back at maturity.”
Moody's Investors Service said it is considering whether to downgrade New York Community Bancorp's credit rating to junk following Wednesday's developments.
Read more: New York Community Bancorp plummets due to real estate risks, shaking market
Banks face about $560 billion in commercial real estate maturities by the end of 2025, more than half of the total real estate debt coming due during that period, Trepp said. Regional lenders in particular are more exposed to the industry and are more likely to be hit harder than larger lenders because they don't have large credit card portfolios or investment banking operations.
Commercial real estate lending accounts for 28.7% of assets at small banks, compared to just 6.5% at large financial institutions, according to a report released in April by JPMorgan Chase & Co. The revelations prompted further scrutiny from regulators, which were already on high alert following last year's local banking turmoil.
In the four years since the pandemic, real estate troubles have become apparent, especially in offices, and the real estate market has come to a standstill in a sense. There is uncertainty for both sellers and buyers about how much a building is worth, and transactions have plummeted. Now, the need to address looming debt maturities and the prospect of Federal Reserve interest rate cuts are expected to result in further trading that will clarify just how much the value has fallen.
These reductions can be significant. Aon Center, the third tallest office tower in Los Angeles, recently sold for $147.8 million, about 45% less than its previous purchase price in 2014.
“Banks (regional and regional banks) were very slow to bring products to market because they didn't have to hold them to maturity,” Baldwin said. “They are playing a game with the true value of these assets.”
multifamily housing loan
Compounding the nerves surrounding small financial institutions, it is impossible to predict when or where real estate loan failures will occur, and just a few defaults can cause havoc. . New York Community Bancorp said the increase in depreciation is related to co-op buildings and office properties.
While office is an area of particular interest to real estate investors, the company's largest real estate exposure comes from multifamily properties, with the bank holding about $37 billion in apartment loans. Almost half of these loans back rent-regulated buildings, making them susceptible to New York state regulations passed in 2019 that severely limit landlords' ability to raise rents.
Late last year, the Federal Deposit Insurance Corporation discounted about $15 billion in loans backed by rent-regulated buildings by 39%. In another sign of the challenges these buildings face, about 4.9% of New York City buildings that are rent-stabilized with securitized loans were rent-stabilized as of December, according to a Trepp analysis based on property occupancy. Delinquencies are triple the rate for other apartment complexes. built.
“Conservative Lender”
New York Community Bancorp, which acquired part of Signature Bank last year, said Wednesday that 8.3% of its apartment loans were criticized and deemed to be at high risk of default.
“Compared to Signature Bank, NYCB was a much more conservative lender,” said David Aviram, principal at Maverick Real Estate Partners. “However, the 2019 rent law changes could have a more significant impact, as loans backed by rent-stabilized multifamily properties make up a higher proportion of NYCB’s CRE book compared to its peers.” There is.”
Pressure is mounting on banks to reduce their exposure to commercial real estate. Some banks have held back large loan sales over the past year due to uncertainty, but are expected to sell even more loans now that the market has thawed.
Canadian Imperial Bank of Commerce recently began selling loans for distressed office properties in the United States. Although U.S. office loans account for just 1% of the company's total asset portfolio, increased credit loss provisions for the segment pushed down CIBC's earnings.
“The proportion of loans that banks have reported to be in arrears so far is miniscule compared to the defaults that will occur in 2024-2025,” Aviram said. “Banks remain exposed to these significant risks, and the possibility of lower interest rates next year will not solve their problems.”
–With assistance from Sally Bakewell.
(Updates with warning about Aozora Bank real estate in second paragraph)
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