The commercial real estate landscape in the United States has been grappling with significant challenges since the onset of the Covid-19 pandemic. New York Community Bancorp and Japan’s Aozora Bank Ltd. have recently emphasized that certain lenders are just beginning to feel the impact of these difficulties.
New York Community Bancorp’s decision to cut its dividend and increase reserves led to a staggering 38% drop in its stock on Wednesday, followed by a further decline to a 23-year low on Thursday. This downturn rippled into European and Asian markets, with Aozora Bank in Tokyo experiencing a more than 20% decrease after cautioning about losses in the US commercial property sector. In Frankfurt, Deutsche Bank AG responded by quadrupling its provisions for US real estate losses.
These events underscore the ongoing decline in commercial property values, coupled with the challenge of predicting which loans may falter. Factors contributing to this scenario include the pandemic-driven shift to remote work and a rapid rise in interest rates, making it more costly for financially strained borrowers to refinance. Billionaire investor Barry Sternlicht recently warned of potential losses exceeding $1 trillion in the office market.
For lenders, this situation raises concerns about increased defaults as landlords struggle to meet loan obligations or abandon properties altogether.
Harold Bordwin, a principal at Keen-Summit Capital Partners LLC, specializing in distressed property renegotiation, highlights the discrepancy between banks’ balance sheets and the reality that much of the real estate may not yield returns upon maturity.
Moody’s Investors Service is considering downgrading New York Community Bancorp’s credit rating to junk following the recent developments.
Banks are confronted with approximately $560 billion in commercial real estate maturities by the end of 2025, according to Trepp, with regional lenders particularly vulnerable due to their greater exposure to the industry.
The KBW Regional Banking Index experienced a 6% decline on Wednesday, its most significant drop since the collapse of Silicon Valley Bank in March of the previous year, followed by an additional 3.2% decrease on Thursday.
Commercial real estate loans constitute 28.7% of assets at small banks compared to only 6.5% at larger institutions, according to a report by JPMorgan Chase & Co., attracting additional scrutiny from regulators already on high alert after last year’s regional banking turmoil.
The looming debt maturities and potential Federal Reserve interest-rate cuts are expected to prompt more deals, providing clarity on the extent of value depreciation.
The sale of the Aon Center in Los Angeles at a 45% discount from its 2014 purchase price illustrates the magnitude of the decline in property values.
While real estate issues, particularly concerning offices, have been evident since the pandemic’s onset, the market has been somewhat stagnant due to uncertainty regarding property valuations. However, the need to address impending debt maturities and potential interest-rate adjustments is anticipated to catalyze more transactions.
The challenges facing smaller lenders are compounded by the unpredictability of distressed real estate loans, with a few defaults capable of causing significant disruptions. New York Community Bancorp’s increase in charge-offs is attributed to a co-op building and an office property.
Multifamily buildings represent the primary real estate exposure for New York Community Bancorp, with approximately $37 billion in apartment loans, nearly half of which are supported by rent-regulated buildings vulnerable to New York state regulations limiting rent hikes.
The Federal Deposit Insurance Corp. sold about $15 billion in loans backed by rent-regulated buildings at a 39% discount, reflecting the challenges these properties face. Approximately 4.9% of New York City rent-stabilized buildings with securitized loans were delinquent as of December, three times the rate for other apartment buildings.
New York Community Bancorp’s relatively conservative lending practices compared to its peers may be affected by the 2019 rent laws’ impact on its portfolio of loans secured by rent-stabilized multifamily properties.
Banks are under pressure to decrease their exposure to commercial real estate, with expectations of increased loan sales as the market stabilizes. Canadian Imperial Bank of Commerce has initiated the marketing of loans on struggling US office properties, anticipating challenges in this segment.
Despite the current delinquency rates being relatively low, the potential for defaults throughout 2024 and 2025 remains a significant concern for banks. The decline in interest rates in the coming year is unlikely to resolve these underlying issues.