Multifamily Loans Loom Large in Regional Bank Risk

RXR CEO Scott Rechler delivered a sobering message during a keynote presentation at CREtech New York on Tuesday that it’s going to be a bumpy landing—and regional banks aren’t out of the woods yet.

Rechler, who in addition to being one of NYC’s largest building owners sits on the board of the New York Fed, called a recession “likely” in a Q&A conversation with Cherre CEO L.D. Salmanson entitled Recalibrating for the New Normal.

“Every day there are new developments that make it more turbulent,” Rechler said. “Fasten your seat belts.”

Perhaps the largest warning sign that there may be some wind shear on the landing strip for the US economy is that the multifamily sector now is second only to struggling offices as a threat to the stability of regional banks.

“Over the last two years, we’ve had record multifamily sales volume around the country. People were buying multifamily buildings at record low cap rates with a view that rents were going to climb—and now interest rates have climbed and rents haven’t climbed,” Rechler said.

“There’s also one million units of multifamily that’s coming online in the next 12 to 18 months in markets like the Sunbelt, and the vast majority of those loans are with regional banks,” he said.

“Second to office, multifamily to me is the biggest risk to [those] lenders,” Rechler said. “When I think of regional banks and the challenges they’re facing, it’s not just office buildings around the country you’ve got to worry about, it’s multifamily that will have to get refinanced. Those are buildings that were bought by investors that may not have been the most responsible in terms of borrowing.”

“They borrowed [on a] 60% to 65% loan-to-value ratio when they invested $100 million in a property, but today that investment is worth $50 million and it’s another $50 million to bring the loan down to where it needs to be,” Rechler said. “They can’t go back to their investors and say ‘what you gave me isn’t worth half of what is was and now I need additional money.’”

Here’s the perfect storm: upside-down loans need to be refinanced, but the regional banks aren’t lending—and regulators are telling these lenders to reduce their real estate exposure, pronto.

“Investors like ourselves do a lot of lending in that space, but the real issue is that the senior lenders aren’t there today. There’s $250B in opportunistic capital out there, but the banks themselves have to lend. If you don’t have the senior lender lending, then that opportunistic capital can’t be put to work,” Rechler said.

“Right now, the plumbing is clogged at the banking level. You have regulators coming in and saying we want you to reduce your real estate exposure, period,” he added.

A big red warning sign flashing: RISK.

“Until we can open up that lending cycle, this is going to weigh on the economy. We’re talking about high interest rates and not have lenders lend slowing down the economy,” Rechler said.

Put your tray tables up and return your seats to the upright position, folks. The flight attendant will be coming by to take your adult beverage, even though you might need a refill or two after reading this.