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Investors have sanctioned shares of commercial real estate lender New York Community Bancorp (NYCB) so far this month. To understand why, it helps to understand the changing economic landscape of rent-stabilized apartments, a staple in New York City.
Local banks’ largest lending exposure is to apartments. Roughly half of its portfolio is tied to numerous apartment complexes in the Big Apple, where annual rent increases are regulated by the government.
And this is what investors are concerned about. Those properties could end up worth much less than they were before due to high interest rates and new rent increase limits, with Wall Street pegging the $116 billion lender’s expected long-term losses. I doubt whether I can endure it.
The Hicksville, New York-based bank is trying to convince investors it has the situation under control.
NYCB’s new executive chairman Alessandro Dinero told analysts Wednesday that the company will seek to reduce its exposure to commercial real estate. The bank also has $3 billion in loans tied to office real estate, another area of potential weakness as working patterns change in big cities.
On Friday, Mr. Dinero and other board members bought approximately $873,000 in NYCB stock, and the vote of confidence sent the stock price up 17%.
The company is still down 53% since Jan. 31, when it cut its dividend and surprised analysts by reporting a quarterly net loss of $252 million. On the same day, the bank announced that it had set aside $552 million, significantly more than expected, to protect against future loan losses to address weaknesses related to office real estate and multifamily properties.
NYCB’s roots are in New York City. Founded in 1859 as the Queens County Savings Bank, it was the first savings bank chartered by New York State in Queens. His company went public in 1993, and in the ensuing decades he became one of the city’s largest financiers to rent-stabilized building owners.
Nearly half of all apartments in New York City are rent stabilized. This is a system designed to keep some units affordable, especially in older buildings built before 1974.
What made apartment complexes so valuable for so long was local laws that gave landlords the freedom to raise rents to match market rates, making these properties a cheap but steady source of income.
New York state’s 2019 changes limited rent increases, squeezing profits for building owners and reducing their incentive to repair properties. Inflation and rising interest rates then made these buildings more expensive to maintain and borrow.
The fear now is that losses and defaults will start to pile up as loans come due and these properties are forced to be sold at deep discounts.
Late last year, the Federal Deposit Insurance Corporation backed a rent-regulated building once owned by Signature Bank, one of three large financial institutions to be seized by regulators in 2023. That’s what happened when it sold about $15 billion in loans. Sales were 39%.
“None of this can happen fast enough.”
And this is also a challenge for NYCB as it tries to emerge from its current predicament. They say they want to reduce the concentration of commercial real estate, but it will be difficult to do so without incurring losses.
“I think [NYCB] Investors are right to be concerned,” said the former banker and current chief executive of Stonecastle, a New York City-based asset management and advisory firm that provides equity and deposit funds to small U.S. banks. said Joshua Siegel, CEO.
“This is going to end badly for the city, because we’re all owed money and someone has to pay,” Siegel said, speaking more broadly about the dynamics of New York City’s multifamily housing market. body,” he said.
“What we want them to do is diversify their operations,” Jonny analyst Chris Marinak told Yahoo Finance.
But “none of this can happen quickly enough for investors worried about stock prices.”
Ratings agency Moody’s announced this week that it downgraded New York CB’s credit rating to junk and highlighted the bank’s exposure to rent-regulated apartment properties. Moody’s said such buildings “have historically performed well,” but “this cycle may be different.”
New York Community Bank announced last week that its rent-regulated portfolio had a loan-to-value ratio of 58% and a minimal non-performing loan rate of 0.52%. However, “criticized” loans accounted for 14% of the portfolio, or $2.4 billion.
Criticized loans accounted for 8.3% of the bank’s entire multifamily book.
“Nothing is different from what we saw in 2008.”
Analysts are debating whether NYCB’s problems are unique or just the beginning of an even bigger drag on many local banks across the country.
According to the Mortgage Bankers Association, half of all outstanding commercial real estate loans are owned by banks, with smaller banks accounting for the majority.
Additionally, late interest on non-owner commercial real estate loans rose in the fourth quarter to the highest level since 2013, said Thorsten Slok, chief economist at Apollo, the parent company of Yahoo Finance. It became.
Siegel said this is not a national crisis. “This is a crisis in the market, and first and foremost, commercial real estate in urban areas that have never modeled vacancy rates this high,” he added.
Treasury Secretary Janet Yellen told senators on Thursday that she “hopes and believes that vulnerabilities in commercial real estate do not become a systemic risk to the banking system.”
However, “some smaller banks may be feeling stressed by these developments.”
Former FDIC Chair Sheila Baer told Yahoo Finance on the same day that there will be “several more bank failures” if lenders are not adequately prepared to absorb potential commercial real estate losses. He said it was possible.
But “this is nothing like what we saw in 2008,” she added, referring to the real estate meltdown that ultimately brought down some of the nation’s largest financial institutions and hundreds of other banks across the country. did.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
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