Banks jittery over real estate
Analysts, regulators predict reckoning around corner as losses loom on industry debt
From San Francisco to Washington, the story is the same. Office buildings remain stuck in a slow-burning crisis. Employees sent to work from home at the start of the pandemic have not fully returned, a situation that, combined with high interest rates, is wiping out value in a major class of commercial real estate. Prices on even higher-quality office properties have tumbled 35% from their early-2022 peak, based on data from Green Street, a real estate analytics firm.
Those forces have put the banks that hold a big chunk of America’s commercial real estate debt in the hot seat — and analysts and even regulators have said the reckoning has yet to fully take hold. The question is whether losses will prove to be a slow bleed or a panic-inducing wave.
Last week brought a taste of the brewing problems when New York Community Bank’s stock plunged after the lender disclosed unexpected losses on real estate loans tied to office and apartment buildings.
So far “the headlines have moved faster than the actual stress,” said Lonnie Hendry, chief product officer at Trepp, a research firm that tracks real estate loans. “Banks are sitting on a bunch of unrealized losses. If that slow leak gets exposed, it could get released very quickly.”
When a string of banks failed last spring — partly because of rising interest rates that had reduced the value of their assets — analysts fretted that commercial real estate could trigger a wider set of problems.
Banks hold about $1.4 trillion of the $2.6 trillion in commercial real estate loans set to mature over the next five years, based on data from Trepp, and small and regional lenders are especially active in the market.
Economists and regulators feared that heavy exposure to the dicey-looking industry might spook bank depositors. But government officials responded forcefully to the 2023 upheaval. They helped sell off failing institutions, and the Federal Reserve set up a cheap bank-funding option. The actions restored confidence.
That has changed with the issues at New York Community Bank. Some analysts are dismissing it as a one-off. And so far, depositors are not pulling their money out of banks in large numbers.
But others see the bank’s plight as a reminder that many lenders are in for pain, even if it doesn’t spur systemwide panic. The government reprieve last year was temporary: The Fed’s funding program is set to shut down next month. Commercial real estate problems are lasting.
About 14% of commercial real estate loans and 44% of office loans are underwater — the properties are worth less than the debt behind them — according to the National Bureau of Economic Research.
Some offices are still officially occupied even with few workers in them — what Hendry called “zombies” — thanks to yearslong lease terms. That allows them to appear viable when they are not.
Jerome Powell, the Fed chair, acknowledged during a “60 Minutes” interview that aired Feb. 4 that “there will be losses.” For big banks, he said, the risk is manageable. When it comes to regional banks, he said the Fed is working with them to deal with expected fallout, and some would need to close or merge.