New York Community Bank issues $560 billion real estate warning to banks

(Bloomberg) — The U.S. commercial real estate market has been in turmoil since the Covid-19 pandemic began. But New York Community Bancorp is a reminder that some lenders are just starting to see the pain.

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The bank’s decision to cut dividends and reserves sent its shares down a record 38% and dragged the KBW Regional Bank Index to its worst day since the collapse of Silicon Valley Bank last March. Japanese bank Aozora Bank Ltd. added to real estate market jitters. Warnings of losses related to U.S. commercial real estate investments sent share prices tumbling in Asia trading.

This concern reflects the continued decline in commercial real estate values ​​and the difficulty in predicting which specific loans may unwind. The backdrop for this phase is a pandemic-induced shift to remote work and rapidly rising interest rates, which are making loans more expensive. Billionaire investor Barry Sternlicht warned this week that the office market losses will exceed $1 trillion.

For lenders, that means more defaults are likely as some landlords struggle to repay their loans or simply leave the buildings.

“This is a big issue that the market has to consider,” said Harold Bordwin, principal at Keen-Summit Capital Partners LLC in New York, which specializes in distressed asset renegotiations. In fact, there is a lot of real estate out there that will not pay off at maturity. “

Moody’s Investors Service said it was considering whether to downgrade New York Community Bank’s credit rating to junk status following Wednesday’s developments.

Read more: New York community banks plunge as housing risks rock market

Trepp said banks will face about $560 billion in commercial real estate debt maturities by the end of 2025, accounting for more than half of total real estate debt maturing during that period. Regional lenders, in particular, have greater exposure to the industry and are willing to be hurt more than their larger peers because they lack large credit card portfolios or investment banks that can protect themselves. business.

A report released by JPMorgan Chase & Co. in April showed that commercial real estate loans accounted for 28.7% of the assets of small banks, compared with only 6.5% of the assets of large banks. The risk triggered additional scrutiny from regulators, who were already on high alert. Regional banking turmoil last year.

While real estate problems, particularly in offices, have been evident in the nearly four years since the pandemic, the real estate market has struggled in some ways: Transaction volumes have been hampered by uncertainty among buyers and sellers about building values. dramatically drop. Now, the need to address looming debt maturities and the prospect of rate cuts from the Federal Reserve are expected to trigger more trading, providing a clear picture of how much value has fallen.

The decline may be significant. The Aon Center, Los Angeles’ third-tallest office tower, recently sold for $147.8 million, about 45% less than its 2014 purchase price.

“Banks — community banks, regional banks — are very slow to bring products to market because they don’t have to, they’re holding on to these products until they mature,” Bodwin said. “They’re playing with these products. the true value of the asset. “

multifamily loans

Adding to the tension surrounding smaller lenders is the unpredictability of when and where bad real estate loans will occur, with just a few defaults having the potential to wreak havoc. New York Community Bank said its write-offs increased related to co-op buildings and office buildings.

While offices are a particular area of ​​focus for real estate investors, the company’s biggest real estate exposure comes from multifamily, where the bank holds about $37 billion in apartment loans. Nearly half of those loans are backed by rent-controlled buildings, making them vulnerable to regulations passed by New York state in 2019 that severely limit landlords’ ability to raise rents.

Late last year, the Federal Deposit Insurance Corporation took a 39% discount on the sale of about $15 billion in loans backed by rent-controlled buildings. In another sign of the challenges these buildings face, about 4.9% of New York City’s rent-stabilized buildings with securitized loans had delinquency rates higher than other apartment building delinquency rates as of December, according to a Trepp analysis based on when the properties were built. three times.

“Conservative Lender”

New York Community Bancorp, which acquired part of Signature Bank’s business last year, said Wednesday that 8.3% of its apartment loans are considered critical, meaning they have a higher risk of default.

“NYCB is a much more conservative lender than Signature Bank,” said David Aviram, principal at Maverick Real Estate Partners. “However, compared to its CRE book, loans secured by rent-stabilized multifamily properties A larger portion of NYCB’s CRE books.” Among peers, changes to rent laws in 2019 are likely to have a more significant impact. “

Pressure is mounting on banks to reduce their exposure to commercial real estate. While some banks have delayed large loan sales due to uncertainty over the past year, they are now expected to sell more debt as markets thaw.

Canadian Imperial Bank of Commerce recently began marketing loans to distressed U.S. office properties. While U.S. office loans make up just 1% of its total portfolio, Canadian Imperial Bank of Commerce’s (CIBC) earnings have been weighed down by rising provisions for credit losses in this area.

“The proportion of loans that banks have reported as delinquent so far is a drop in the bucket compared to defaults that will occur in 2024 and 2025,” Aviram said. “Next year’s interest rates will not solve the banks’ problems.” “

—With help from Sally Bakewell.

(Updates second paragraph of Aozora Bank real estate warning)

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