CRE Lending Exposure Could Mean Fresh Trouble For Regional Banks
Distress is rising in regional banks’ loan books, threatening their stability and echoing the year-ago collapses of Silicon Valley Bank, Signature Bank and Credit Suisse.
New York Community Bancorp, Japan’s Aozora Bank and Deutsche Pfandbriefbank are the latest regional banks to worry investors, with much of the focus on commercial real estate debt, Bloomberg reported.
But they are also keeping a sharp eye on OceanFirst Bank, Valley National Bank and other lenders with CRE exposure above regulatory guidelines, according to Reuters. Like NYCB, OceanFirst and Valley National are in the danger zone with CRE holdings above 300% as a proportion of total risk-based capital, the outlet reported, citing Trepp data.
Increased borrowing costs and decreased property values are stressing loans throughout all sectors of the industry, and the work-from-home trend has dealt an extra blow to the office market.
Almost $3T of U.S. CRE debt is set to mature in the next five years, according to Trepp, and nearly 70% of all bank-held commercial real estate loans outstanding come from small banks, per Apollo research.
About $1.2T in commercial mortgages will mature this year and next, Reuters reported, pointing to research from Goldman Sachs.
“The regional banks ... [are] doubly more exposed to rates,” Dan Zwirn, co-founder and CEO of distressed debt investment firm Arena Investors, told Reuters, adding that Arena Investors is avoiding real estate for the next year or two, citing the higher risk of default as a deciding factor.
NYCB garnered significant attention last week when it announced a surprise loss tied to its credit book. The bank that acquired part of Signature Bank in 2023 has been downgraded to junk by Moody’s and is looking to diminish risk on a $5B mortgage portfolio.
NYCB’s Jan. 30 earnings release exposed its real estate pain and led short seller William C. Martin of Raging Capital Ventures to bet against it, Reuters reported. Martin also shorted Silicon Valley Bank last year before its collapse.
NYCB is a major lender to landlords of rent-stabilized properties in New York City. Delinquency rates for loans backed by rent-stabilized buildings were on the rise last year as restricted rent rolls failed to keep pace with increased costs. Some rent-stabilized portfolios traded for huge discounts while others have faced foreclosure, Bisnow previously reported.
The default rate on New York’s rent-stabilized housing rose from 0.32% in April 2020 to 4.93% in December 2023, Reuters reported using Trepp data.
Meanwhile, Japan's Aozora Bank recorded its first loss in 15 years due to bad U.S. commercial property loans and set aside $221M to deal with them, Bloomberg reported. The European Central Bank has signaled lenders that they could face higher capital requirements if they fail to grasp the risks they face from commercial real estate.
“You’ve got more banks that are coming under scrutiny, more banks falling casualty, and potentially some banks defaulting on both sides of the Atlantic,” Jonathan Golan, a portfolio manager at Man Group, told Bloomberg.
Deutsche Pfandbriefbank saw its bonds collapse last week after Morgan Stanley recommended its clients sell PBB’s senior notes. The German lender specializes in commercial real estate lending and has a large exposure to the U.S.
Investors think some regional banks could be forced to sell loans at a loss or increase provisioning for losses, Reuters reported.
CORRECTION, FEB. 13, 2:48 P.M. CT: A previous version of this story did not properly contextualize the percentage of commercial real estate loans from small banks. The article has been updated.
