NY Fed: CRE Stress Will Prevent Full NYC Recovery

A new report from the New York Fed has underlined an alarm sounded by a member of its Board of Directors—RXR CEO Scott Rechler—that the banking system is at risk of a “systemic crisis” due to a wall of CRE debt that is about to come due—a large portion of it backed by NYC office buildings.

According to the NY Fed report, heavy stress in the New York City commercial real estate sector may tip the scale against a full economic recovery for NYC.

“While the residential rental market has bounced back, the retail and office markets have remained slack, largely due to the shift to remote work and online shopping,” the report said, in a posting on the bank’s website.

Commercial rents are sagging far below where they were before the pandemic in NYC, the report said. “This weakening trend may continue as more and more commercial tenants roll off leases that were negotiated when demand for office and retail space was far stronger,” NY Fed’s analysts said.

On March 24, Rechler sounded an alarm on Twitter about the impending crisis of a $1.5T wall of maturing CRE debt during the next three years.

Rechler tweeted: “The bulk of this debt was financed when base interest rates were near zero. This debt needs to be refinanced in an environment where rates are higher, values are lower, & in a market with less liquidity.”

Rechler said he’s joined with the Real Estate Roundtable “in calling for a program that provides lenders the leeway and flexibility from regulators to work with borrowers to develop responsible, constructive refinancing plans.”

“This program will provide time for the markets to settle & enable the private sector to address the deleveraging that is required to reflect the new interest rate regime. We can avoid unnecessary economic pain & a bailout, like what we saw in the ’80s with the S&L Crisis,” Rechler tweeted.

“If we fail to act, we risk a systemic crisis with our banking system & particularly the regional banks, which make up 80% of RE lending. There will be pressure on our municipalities, which derive over 70% of their tax revenues from property taxes,” he warned.

According to the NY Fed report, office work patterns in NYC appear to have settled on three days of bustling activity—on Tuesday, Wednesday and Thursdays—with Monday’s optional and Friday a universal holiday.

“It’s very clear that the absence of office workers is continuing to put strains on the New York City economy,” said Jaison Abel, head of Urban and Regional Studies at the bank, in a press briefing reported by Reuters.

On days that workers don’t come into the office, it means no traffic for retail outlets and leisure firms, impairing employment in those sectors, Abel said.

According to the NY Fed, areas surrounding NYC are largely recovered on the jobs front, but the city still has a shortfall in workers compared to the level before the pandemic.

Mayor Eric Adams recently agreed to a new contract with the largest municipal union that creates a program to allow non-essential city workers to work remotely.

Adams said the city made the concession because it is having trouble retaining workers and hiring replacements because of the availability of remote and hybrid jobs in the private sector.