$1B Later and NYCB Still Has Work to Do

Fresh off of its $1 billion infusion of equity yesterday and New York Community Bancorp executives are still trying to reassure the market of its stability. Joseph Otting, former Comptroller of the Currency in the Trump administration, who was named CEO of the bank as part of the investment, will unveil a new business plan for the institution next month.  The bank has also pledged to reduce its exposure to CRE loans. The bank is pinning its hopes on Otting, its third CEO in weeks, as he is credited with reviving IndyMac, which was bought out of Federal Deposit Insurance Corporation’s receivership in 2009 by an investor group.

But some analysts have their doubts. “Even the link with the OCC may not be the glowing endorsement that it seems, given that it was the OCC waived through NYCB’s acquisition spree that has done so much to get it in trouble in the first place,” said Russ Mould, investment director at AJ Bell, told Reuters.

More fundamentally, raising funds in exchange for equity doesn’t cancel the fact that it still has mountains of bad debt, Jeff Holzmann, Chief Operating Officer at RREAF Holdings, tells GlobeSt.com. “The funds raised will help the bank with liquidity, restructuring of its practices (as the bank put it), and maintaining its share price. In other words, it’s a lifeline to avoid spiraling out of control.”

The bank also has excessive exposure to rent-regulated buildings in New York City, Pierre Debbas, partner and founding member of New York-based Romer Debbas, points out, a category that suffered a tremendous loss when the city changed its rent regulations in 2019.

“These changes, coupled with the drastic increase in interest rates, have created this crisis for regional banks with a large volume of multi-family loans in New York City,” he said.

Debbas said that regional banks with a large exposure to office buildings will certainly be at risk this year and the hope is that rates decline in late spring. Then, borrowers can refinance and potentially inject more equity into these properties to make them cash flow positive.

“The harsh reality is that the impacts of the pandemic, local politics, and Fed policies are creating distress amongst most regional banks in New York,” according to Debbas.

Indeed, observers are noting that NYCB is just a microcosm of what is happening among many regional banks.

Because property values haven’t repriced for a higher rate environment, this week’s NYCB news means more losses are coming to the regional bank category, Yang Tang, CEO & Co-Founder of Arch Indices, tells GlobeSt.com. “And more struggles are clearly on the way,” he said.

Chad Littell, national director of U.S. capital markets analytics at CoStar Group, agrees that commercial real estate is in for a multi-year price correction.

“The longer interest rates remain high relative to yesterday’s borrowing costs, the more stress we will observe in the banking sector,” he said. “It appears that we will see additional stress in the multifamily space in 2024 and sectors that are inundated with new supply.”

Littell said it’s challenging to envision a scenario where only a few regional and community banks face stress from commercial real estate loans.  Since 2017, large banks have started to limit their growth in commercial real estate loans, allowing smaller banks to step in and fill the gap, he said.

The Federal Reserve reports that commercial real estate loans at small banks increased by as much as 18% year-over-year in Q2 2023. However, this figure has dropped to around 5% year-over-year as transaction activity decreased by 50% from 2022.

“Over the past five years, approximately $640 billion in office assets have been traded, with financing involved in most transactions,” according to Littell. “Banks typically provide about 40% of all commercial real estate lending, so there could be a significant volume of underwater office loans on bank balance sheets. In the market segment where office buildings sell for over $10 million, the typical decline in value is as much as 35% from the all-time high in 2021.”

Net Lease Spring:

Held April 16-17 in NYC, Net Lease Spring will bring together hundreds of dealmakers from the nation’s top firms. This year’s program will feature 5.5 hours of face-to-face networking and over 5 hours of content focused on micro and macro trends for 2024, being resilient through market volatility, how to serve your corporate tenant clients and much more! Learn more or register here.

Multifamily Spring:

Multifamily Spring is coming to New York City this April 18. This year’s program will bring together the industry’s most influential and knowledgeable real estate executives from the multifamily sector for 5 hours of face-to-face networking and over 5.5 hours of can’t miss sessions. Learn more or register here.