The turbulence in the US commercial real estate market amid the Covid-19 pandemic has brought forth significant concerns, with New York Community Bancorp serving as a notable example of the challenges faced by some lenders.
Following a Delaware judge’s dismissal of Tesla’s record-breaking $56 billion pay package, which raised eyebrows in the market, the bank’s decision to reduce its dividend and bolster reserves led to a staggering 38% drop in its stock value. This move also contributed to the KBW Regional Banking Index’s worst performance since the collapse of Silicon Valley Bank last March. Adding to the unease, Japanese lender Aozora Bank Ltd. cautioned of a potential loss linked to investments in US commercial real estate, resulting in a sharp decline in shares during Asian trading.
The apprehension reflects the persistent decline in commercial property values, compounded by challenges in predicting which specific loans may unravel. Factors such as the pandemic-induced shift to remote work and a rapid rise in interest rates have made it more difficult for financially strained borrowers to refinance. Notably, billionaire investor Barry Sternlicht recently warned of potential losses exceeding $1 trillion in the office market.
For lenders, this scenario raises concerns about an uptick in defaults as landlords struggle to meet loan obligations or opt to relinquish ownership of properties.
Harold Bordwin, a principal at Keen-Summit Capital Partners LLC in New York, specializing in renegotiating distressed properties, highlighted the significance of this issue, emphasizing that banks’ balance sheets may not adequately account for the substantial portion of real estate that may not yield returns upon maturity.
Moody’s Investors Service is considering a potential downgrade of New York Community Bancorp’s credit rating to junk status following the recent developments.
Small and regional banks are particularly vulnerable to the commercial real estate sector’s challenges, as highlighted in a report by JPMorgan Chase & Co. Commercial real estate loans represent a significantly higher proportion of assets for these institutions compared to larger lenders, making them more susceptible to market fluctuations.
Despite challenges in the real estate sector over the past few years, transactions have been limited due to uncertainties surrounding property valuations. However, the need to address looming debt maturities and potential Federal Reserve interest rate cuts is expected to catalyze more transactions, providing clarity on the extent of value declines.
The uncertainty surrounding smaller lenders is further exacerbated by the unpredictable nature of distressed real estate loans, with a few defaults posing significant risks. New York Community Bancorp cited an increase in charge-offs related to a co-op building and an office property.
While offices remain a key area of concern for real estate investors, the company’s exposure primarily stems from multifamily buildings, with approximately $37 billion in apartment loans. The bank’s portfolio includes a significant portion of loans backed by rent-regulated buildings, subject to regulations that limit landlords’ ability to raise rents.
Pressure is mounting on banks to mitigate their exposure to commercial real estate, with expectations of increased loan sales as the market rebounds. Canadian Imperial Bank of Commerce, for instance, has initiated the marketing of loans on struggling US office properties, anticipating a rise in defaults in the coming years.
David Aviram, principal at Maverick Real Estate Partners, emphasized the impact of the 2019 rent laws on New York Community Bancorp’s portfolio, particularly its loans secured by rent-stabilized multifamily properties. Aviram underscored the importance of banks taking proactive measures to address these risks, as interest rate fluctuations alone may not suffice to resolve underlying issues.
