Commercial real estate woes put regional banks in spotlight

Mon, Feb 12, 2024, 10:08 AM

Concerns about New York Community Bancorp (NYCB) and its commercial real estate portfolio has investors re-visiting regional banks' exposure to the beleaguered sector. According to research from Apollo Global Management, Yahoo Finance's parent company, showed that small banks account for 70% of all outstanding commercial real estate loans. If there is trouble in the market, there could potentially be trouble for smaller lenders.

Stijn Van Nieuwerburgh, Columbia Business School Professor of Real Estate, joins Yahoo Finance to discuss fears surrounding real estate as regional banks are showing signs of weakness in the sector.

Nieuwerburgh comments on the impact of remote work on property value for commercial spaces: "Office leases are long-term in nature. Even today there's a lot of tenants serving out their pre-pandemic leases. Over the last four years, a lot of tenants have already reduced their office demand. In a recent survey by CBRE, something like 40% of companies are indicating that they want to cut their office demand even more... by 30% or more in the next three years. This is sort of a train wreck in slow motion. As leases are coming up for renewal, tenants are deciding not to renew them. That causes cash flow issues for the landlords of these buildings and eventually when the mortgage comes due, they may not be able to refinance the mortgage."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- Well, fears around the health of the regional banking sector are being reignited again after New York Community Bancorp's recent earnings report pointed to losses in its commercial real estate portfolio. Those struggles have put the commercial real estate market back under the spotlight.

Research from Apollo Global Management, the parent company of Yahoo Finance, shows that small banks account for 70% of all outstanding commercial real estate loans. Trouble in the market potentially could mean trouble for more of these smaller lenders.

Joining me now is Stijn Van Nieuwerburgh, he's Columbia Business School professor of real estate. Professor, it's good to talk to you today. I want to start specifically on the issue of New York Community Bancorp because I think investors have been trying to figure out how much of what we saw reflected in their balance sheet is specific to NYCB. How much of this is about a broader collapse, if you will, that's likely to come? I mean, you've been modeling out some of these scenarios. How do you view this?

STIJN VAN NIEUWERBURGH: Well, Akiko, I think that there's a broader commercial real estate issue that we're facing here, right? Most notably in the office market where vacancy rates have been rising, rents have been falling, and loans have been coming to a head and failing to refinance over the past year. New York Community Bank has a lot more multifamily exposure than office exposure. But even there in the multifamily market, we're seeing weakness.

- Let's start by talking more about the office space because I know you've been modeling out the impacts from remote work. At the end of the day, this is about just the change in the way we work. We don't necessarily go into offices anymore. If you've walked around New York City, you see how empty some of these office spaces are. What does that ultimately mean in terms of the decline of the value of some of these spaces?

STIJN VAN NIEUWERBURGH: So my research has sort of quantified that the decline in office demands due to the combination of remote work but also higher interest rates ultimately results in a loss of value of around 50% for commercial property, for office buildings, which is a dramatic decline and in many cases would wipe out the equity in some of these underlying buildings.

- And when are we likely to see that? I mean, the concern is, of course, when those loans come due, the payment just isn't going to be there because of that decline in value. I mean, you sort of mentioned that look, when you think about where tenants are right now, they are in the process of figuring out what that next step should be when they have to renew the leases. At what point does this all sort become an avalanche?

STIJN VAN NIEUWERBURGH: So I mean, office leases are long-term in nature. So even today, there's still a lot of tenants that are serving out their pre-pandemic leases. But over the last four years, a lot of tenants have already reduced their office demand.

And in a recent survey by CBRE, something like 40% of companies are indicating that they want to cut their office demand even more by a further 30% or more in the next three years. So this is sort of a train wreck in slow motion. As these leases are coming up for renewal, a lot of tenants are deciding not to renew them. That causes cash flow issues for the landlords in these buildings. And eventually when that mortgage comes due, they may not be able to refinance that mortgage.

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Commercial real estate woes put regional banks in spotlight

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