The US commercial real estate market has been in turmoil since the outbreak of COVID-19. But New York Community Bank (NYCB.US) reminds people that some small and medium-sized banks are only just beginning to feel the pain of high interest rates and commercial real estate turmoil. Statistics show that by the end of 2025, the US banking industry will face commercial real estate debt maturing up to 560 billion US dollars, accounting for more than half of the total real estate debt due during the same period. In particular, some small and medium-sized regional banks in the US are very exposed to commercial real estate, and may be more negatively impacted than larger commercial banks.

New York Community Bank's decision to cut dividends and reserve reserves during the US regional banking crisis last year caused its stock price to plummet by a record 38%, and dragged down the KBW Regional Banking Index (KBW Regional Banking Index) on Wednesday to record its worst trading day since Silicon Valley Bank (Silicon Valley Bank) went bankrupt at the speed of light in March last year.

Driven by New York Community Bank's stock price plummeting 37.67%, US regional bank stocks generally fell. Previously, the bank cut dividends and unexpectedly lost money, which once again raised concerns about the health of small and medium-sized banks in the US. The KBW Regional Banks Index closed down 6% on Wednesday, the biggest one-day decline since March 13 last year. Silicon Valley National Bank (VLY.US) closed down more than 7%, while Citizens Financial Services (CZFS.US) and Regional Finance (RF.US) both fell more than 4%.

The latest fourth quarter earnings report released by New York Community Bancorp (New York Community Bancorp) showed an unexpected loss of US$260 million, while analysts had previously expected net profit of about US$206 million; the loss per share was $0.36. Meanwhile, Community Bank of New York announced a 5 cent dividend cut, far short of analysts' expectations to keep the dividend at 17 cents.

Judging from financial data, the biggest reason for New York Community Bank's quarterly losses was that the bank's loan loss provision for the quarter reached 552 million US dollars, ten times higher than analysts' expectations, and far exceeded the previous quarter's 62 million US dollars, indicating a deterioration in credit prospects. It should be noted that one of the reasons behind such huge provision is that after taking over the bank that signed last year's thunderstorm, the bank's assets reached the 100 billion US dollar mark, so it is necessary to reserve more capital and loss provisions according to regulatory regulations.

At about the same time, Aozora Bank Ltd. (Aozora Bank Ltd.) warned that the bank's investment in US commercial real estate could lose a lot of money, which heightened tension in the US commercial real estate market and caused bank stocks in the Japanese stock market to plummet. Some analysts believe that the New York Community Bank financial report thunderstorm case has certain peculiarities, but it is a fact that bad debts in the US banking industry and high risk in the commercial real estate industry are visible in a high interest rate environment.

This concern reflects the continuing downward trend in US commercial real estate values under the pressure of high interest rates, and the difficulty of predicting which specific loans may collapse. The reason behind this situation may be that the COVID-19 pandemic has caused people to habitually switch to remote work, and interest rates quickly rose to their highest level in 22 years after the start of the Federal Reserve's interest rate hike cycle, making refinancing more expensive for struggling borrowers. Billionaire investor Barry Sternlicht warned this week that the US office market could face losses of more than $1 trillion.

For some lenders, this means that as some landlords struggle to repay loans or simply leave commercial buildings in default, default rates rise rapidly.

“This is a big issue that the market must consider,” said Harold Bordwin (Harold Bordwin), head of Keen-Summit Capital Partners LLC in New York. The company specializes in renegotiation of bad properties. “Banks' balance sheets don't take into account the fact that there is a lot of real estate that won't be fully repaid at maturity.”

Moody's Investors Service (Moody's Investors Service) said it is considering whether to downgrade the credit rating of New York Community Bancorp (New York Community Bancorp) to a “junk level” after Wednesday's developments.

With $560 billion in debt rolling in, can small and medium banks in the US withstand it?

According to Trepp's statistics, by the end of 2025, the US banking sector will face up to 560 billion US dollars of commercial real estate debt maturing, accounting for more than half of the total real estate debt due during the same period. Small and medium-sized regional banks, in particular, have a large exposure to commercial real estate and are likely to be more negatively impacted than larger commercial banks because they lack large credit card portfolios or investment businesses to protect themselves from the impact.

Commercial office buildings are leading to a sharp decline in the value of commercial real estate in the US — in fact, the prices of most types of real estate have dropped sharply

According to a report released by JPMorgan in April last year, commercial real estate loans account for 28.7% of the assets of small regional banks in the US, compared to 6.5% for large banks. This risk exposure has prompted further scrutiny by regulators. Major US regulators are already on high alert after the US regional banking crisis last year.

Although problems in the real estate market (especially office buildings) have been very obvious in the nearly four years since the outbreak of COVID-19, the real estate market has remained unstable to a certain extent: as buyers and sellers are uncertain about the value of buildings, the number of large-scale transactions has been drastically reduced. Now, due to the need to resolve the debt problem that is about to expire, and the prospect that the Federal Reserve may cut interest rates, it is expected to trigger more transactions, making it clear how much the value has actually fallen.

These declines are probably a very clear picture. The Aon Center (Aon Center), the third-tallest office building in Los Angeles, recently sold for $147.8 million, about 45% lower than the previous purchase price in 2014.

Baldwin said, “Community banks and regional banks in the US have been slow to act in terms of market capitalization because they have not had to do this for a long period of time, but have always held until maturity.” “They're playing games on the real value of these assets.”

Loan size for multi-family housing

It is difficult to predict when and where the real estate loan problem will occur, increasing the tension surrounding small lenders, and only a few defaults can cause serious damage. Community Bank of New York said the increase in its write-off amount was related to a cooperative apartment building and an office property.

Although office buildings are an area of particular interest to real estate investors, the bank's largest real estate exposure comes from multi-family homes, and the bank has about 37 billion US dollars in apartment loans. Nearly half of these loans are funded by rent-regulated buildings, making them vulnerable to New York State regulations passed in 2019 that severely limit landlords' ability to raise rents.

At the end of last year, the US Federal Deposit Insurance Corp. (Federal Deposit Insurance Corp.) sold about $15 billion in loans secured by rent-controlled buildings and received a transaction discount of about 39%. Another sign that these apartment buildings are facing challenges is that, according to Trepp's analysis based on the construction time of these properties, as of December of last year, the proportion of rent-stable apartment buildings with securitized loans in New York City was about 4.9%, which is three times the ratio of loans in arrears for other apartment buildings.

A “conservative bank”

New York Community Bancorp (New York Community Bancorp), which bought most of the shares in Signature Bank (Signature Bank) during the US regional bank crisis last year, said on Wednesday local time that 8.3% of the bank's (New York Community Bank) apartment loans were considered problematic, which meant that these loans had a high risk of default.

David Aviram (David Aviram), head of Maverick Real Estate Partners, said: “Compared to signature banks, New York Commercial Bank is a much more conservative bank.” “However, since loans secured by multi-family housing properties with stable rents account for a larger proportion of New York Community Bank CRE books compared to peers, changes in the 2019 rent law are likely to have a greater impact.”

Currently, the US banking sector is under increasing pressure, and investors are demanding that they reduce their exposure to commercial real estate. Some small to medium banks in the US have delayed large-scale loan sales due to uncertainty over the past year, but they are now expected to launch more debt products as the market unfreezes.

The Canadian Imperial Bank of Commerce (CIBC) recently began selling loans to struggling US office buildings. Although US office loans account for only 1% of its total asset portfolio, CIBC's earnings are still being greatly hampered by increased credit loss provisions in the sector.

Avilam said, “The percentage of delinquent loans reported by banks so far is only a drop in the ocean compared to the default that will occur in 2024 and 2025.” “Banks are still facing these major risks, and the expected fall in interest rates next year will also make it difficult to resolve the commercial real estate problems faced by banks.”