Real estate pain for US regional banks is piling up، say investors

New York Community Bancorp'sexposure to commercial real estate has intensified investor scrutiny around regional banks، with some expecting more pain for those with office and multifamily property loans.

Fears about the health of the smaller banks have escalated again a year after thecollapse of Silicon Valley Bankin spring of 2023 triggered aregional banking crisis.

NYCB's recent earnings release which sparked a dive of about 60% in its shares has particularly focused investors on combing through portfolios of regional banks، as small banks account for nearly 70% of all commercial real estate (CRE) loans outstanding، according to research from Apollo.

“As long as interest rates stay high، it's hard for the banks to avoid problems with CRE loans،" said short-seller William C. Martin of Raging Capital Ventures، who decided to place a bet against NYCB after the bank'sdisastrous Jan. 30 earnings releasewhich detailed real estate pain and led him to believe that shares could sink further on more real estate losses.

Capital increase is an option

Martin، who shorted Silicon Valley Bank last year before its collapse، said he shorted NYCB because he thought its earnings power would be diminished and that it might have to raise capital. NYCB said on Wednesday that a capital increase is an option، but that it has no plan to do this "right at the moment."

The bank declined to comment on the short-seller's view.

"The regional banks... (are) doubly more exposed to rates،" said Dan Zwirn، co-founder and CEO of distressed debt investment firm Arena Investors، who is avoiding real estate for the next year or two، citing in part higher risk of default. The KBW Regional Banking indexis down around 11% since NYCB's announcement.

The CRE market has been hit by the repercussions of the COVID-19 pandemic. Delinquency rates on commercial mortgage-backed securities (CMBS) are expected to rise to 8.1% in 2024، according to Fitch، as many companies struggle to convert remote and hybrid-working employees. Meanwhile CMBS loan delinquencies in commercial multifamily - housing properties with more than five units - are expected to touch 1.3% in 2024 versus 0.62% in 2023.

CRE has also faced pressure from higher interest rates where roughly $1.2 trillion in commercial mortgages are set to mature this year and next، Goldman Sachs research showed.

Some have also assigned greater risk to commercial multifamily assets in New York City.

Total multifamily loan portfolio

Unique to NYCB is its role as a major lender to rent-stabilized landlords in New York City. More than half of its total multifamily loan portfolio is secured by properties in New York state، many of which are subject to rent regulation laws،the company has said. The default rate on New York’s rent-stabilized housing has historically been low، but has risen from 0.32% in April 2020 to 4.93% in December 2023، impacted by the pandemic and a 2019 law limiting landlords'ability to raise rents،، said Stephen Buschbom، research director at real estate data provider Trepp.

As banks start taking up provisions for their New York property more broadly، “you could have a possible next wave of the crisis that began unfolding last year،" said Nate Koppikar of Orso Partners، who is short banks that have outsized CRE exposure. He declined to elaborate.