New York Community Bancorp Faces Investor Scrutiny as Concerns Rise Over Commercial Real Estate Exposure
Investors are closely monitoring regional banks, including New York Community Bancorp (NYCB), amid growing concerns over their exposure to commercial real estate (CRE). The collapse of Silicon Valley Bank last year triggered a regional banking crisis, and now fears about the health of smaller banks have resurfaced. NYCB’s recent earnings release, which resulted in a sharp decline in its shares, has further piqued investor interest in examining the portfolios of regional banks.
Research from Apollo reveals that small banks account for nearly 70% of all outstanding commercial real estate loans. Short-seller William C. Martin of Raging Capital Ventures believes that as long as interest rates remain high, banks will continue to face challenges with CRE loans. Martin, who had previously shorted Silicon Valley Bank before its collapse, decided to place a bet against NYCB due to concerns about the bank’s earnings power and the potential need for capital raising.
Dan Zwirn, co-founder and CEO of distressed debt investment firm Arena Investors, warns that regional banks are particularly vulnerable to interest rate fluctuations and cites a higher risk of default. The KBW Regional Banking index has declined approximately 11% since NYCB’s recent announcement, adding to the growing unease.
The outlook for commercial real estate is not optimistic, with delinquency rates on commercial mortgage-backed securities (CMBS) expected to rise to 8.1% in 2024. The transition to remote and hybrid working has led to many companies struggling, making it harder for them to make their mortgage payments. Furthermore, CMBS loan delinquencies in commercial multifamily properties are projected to reach 1.3% in 2024, compared to 0.62% in the previous year. The pressure is further compounded by higher interest rates and a significant number of commercial mortgages set to mature this year and next, totaling approximately $1.2 trillion.
A significant portion of NYCB’s multifamily loan portfolio is tied to properties in New York state, many of which are subject to rent regulation laws. Despite historically low default rates, the pandemic and a 2019 law restricting rent increases have contributed to an increase in defaults, rising from 0.32% in April 2020 to 4.93% in December 2023. As banks start to account for potential losses on their New York properties, concerns are mounting about a possible next wave of the crisis that began last year.
Investors are focusing on banks with a high concentration of real estate loans, including NYCB, as well as Valley National Bancorp and NBT Bancorp. Data indicates that these banks have commercial real estate holdings that account for more than 300% of their total risk-based capital. Such levels of concentration indicate a significant risk exposure to commercial real estate. Moreover, nearly 1,900 banks with assets below $100 billion have outstanding commercial real estate loans that exceed 300% of their equity.
While some regional banks are considering selling loans or increasing provisions for losses, the current property valuations present a challenge. Selling loans at a loss may not be an optimal solution, as properties are now valued significantly lower, ranging from 50% to 75% below their original appraisal. Ran Eliasaf, founder and managing partner of a real estate investment firm, cautions that loans originated in the past five to seven years are particularly vulnerable in the current market.
As the spotlight intensifies on NYCB and other regional banks, it remains to be seen how they will navigate the challenges posed by their exposure to commercial real estate. NYCB has mentioned potential options such as loan sales and reducing their concentration in commercial real estate, but the path forward is uncertain. Investors will continue to closely monitor these banks and evaluate their strategies in the face of a potentially worsening real estate market.
Analyst comment
Negative news.
As concerns rise over regional banks’ exposure to commercial real estate, NYCB’s recent earnings decline and high interest rates pose challenges for CRE loans. The KBW Regional Banking index has declined, signaling growing unease. The outlook for commercial real estate is pessimistic, with rising delinquency rates and a high number of maturing commercial mortgages. NYCB’s high concentration of real estate loans and the increase in defaults in their New York properties raise concerns about a possible crisis. Investors will watch closely for NYCB’s strategies to navigate this challenging market.
